TA saturation is one of the key issues to be solved in transformer differential protection. Deep analysis and simulation study of transformer TA saturation showed that when TA saturate, external fault currents contain a great amount of point mutations, while the internal fault current continuous. According to the conclusion, we propose a new method for distinguishing transformer internal and external fault based on wavelet packet transform.First, wavelet packet transform respectively decompose internal and external fault current with TA saturation, then calculate energy of decomposed signals. The difference among signals is quantified and can be observed visually. Simulation results show that the method can distinguish internal and external fault current under the condition of TA saturation and timely prevent possible damage and can prevent transformer differential protection mal-operation.