An air-gapped current transformer(CT) has been used to reduce a remanent flux in the core, particularly in the case of auto-reclosure. However, it causes larger transient, ratio and phase errors than the iron-cored CT because of the small magnetizing inductance. This paper proposes a compensation algorithm for the secondary current of the air-gapped CT during the fault conditions including auto-reclosure as well as in the steady-state. The core flux is calculated from the measured secondary current of the CT and inserted into the hysteresis loop to estimate the exciting current. Finally, the correct current is estimated by adding the measured secondary current to the estimated exciting current. Various test results clearly indicate that the proposed compensating algorithm can improve the accuracy of the air-gapped CT significantly and reduce the required core cross-section of the air-gapped CT significantly.