In this paper, the authors present the analysis of digital differential protection for three phase power transformers. Power transformer is the key element in electrical power system. Proper protection is needed for economical and safe operation of electrical power system. Power transformer protective relay should block the tripping during external fault or magnetizing inrush and speedily operate the tripping during internal faults. This paper is to analyze digital differential protection during internal and external fault and to operate the relay with proper fault discrimination.