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The phenomenon of magnetizing inrush is a transient condition, which occurs primarily when a transformer is energized. The magnitude of inrush current may be as high as ten times or more times of transformer rated current that causes malfunction of protection system. So, for safe running of a transformer, it is necessary to distinguish inrush current from fault currents .In this paper, a wavelet-based technique has been used to discriminate inrush current from faults. For this purpose, a wavelet transform (WT) concept is presented and a criterion based on different behaviors of the differential currents under fault and inrush conditions have been derived. For checking the validity of the wavelet-based technique in discriminating of inrush currents from faults a three-phase 20/63 kV transformer has been simulated in Maxwell software that is based on finite element method (FEM). Then, obtained data from different situations have been used in MATALB software for implementation of the WT technique.