This paper proposes a modified current differential relay for transformer protection unaffected by the remanent flux. The relay uses the same restraining current as a conventional relay, but the differential current is modified to compensate for the effects of the exciting current. To cope with the remanent flux, before saturation, the relay calculates the core-loss current and uses it to modify the measured differential current. When the core then enters saturation, the initial value of the flux is obtained by inserting the modified differential current at the start of saturation into the magnetization cure. Thereafter, the actual core flux is then derived and used in conjunction with the magnetization curve to calculate the magnetizing current. A modified differential current is then derived that compensates for the core-loss and magnetizing currents. The performance of the proposed differential relay was compared against a conventional differential relay. Results indicate that the modified relay remained stable during severe magnetic inrush and over-excitation because the exciting current was successfully compensated. This paper concludes by implementing the relay on a hardware platform based on a digital signal processor. The relay discriminates magnetic inrush and over-excitation from an internal fault and is not affected by the level of remanent flux.