In order to solve the problem that protection cannot act reliably caused by CT saturation, this paper puts forward a new method of CT saturation detection and fault area judgement based on local mean decomposition (LMD) principle for bus differential protection. By decomposing the CT transient current, CT saturation can be detected through the mutations of instantaneous frequency of high frequency component. Based on different time interval of mutations of the instantaneous frequency decomposed from differential current, the fault area, such as the internal fault, external fault and the general transform fault can be identified accurately. EMTP-ATP software is used to simulate the application of the method, the result shows that it can detect CT saturation and identify the fault type accurately under the CT saturation.