Discrimination between inrush current and internal fault current has been a challenging issue in power transformer protection. By introducing the theory of instantaneous reactive power， a new algorithm based on the variation of DC component ratio of real power to reactive power of transformer differential power is proposed to discriminate the transformer inrush current and the internal fault current. The proposed new method is of the characteristics of convenient data sampling， low computation cost and reliable operation， and is easy to realize. From the angle of conservation of energy and the relationship between real and reactive power， the essential difference between transformer inrush current and fault status is revealed. Results of RTDS simulation tests show that the proposed method is simple and reliable in providing distinct discrimination.