This paper deals with application of Wavelet Transform for detection of busbar faults and to discriminate them from external faults. The detail coefficients of differential current and those of a source CT current are obtained over a narrow moving window. The Fault indexes of both current signals obtained are compared with their respective threshold values to detect the internal faults. In the event of external faults the d-coefficients of differential current have a time shift compared to that of source current due to saturation of CT and this is used to discriminate the external faults from internal faults. The scheme is tested for different types of external and internal faults with variations in incidence angles and fault impedances. The proposed scheme is proved to be fast, stable and reliable in detecting the internal faults and discriminating them from external faults. © 2006 IEEE.