The utilization of low-voltage direct current (LVdc) distribution system is gaining popularity in recent years due to its numerous advantages. However, the development of efficient fault detection scheme for an LVdc microgrid is a challenging problem. This article proposes a fast and effective variational mode decomposition (VMD)-based fault detection technique for the LVdc distribution system with penetration of renewable sources using the local end current measurements only. This scheme processes the rate of change of current signal of the distribution lines through the VMD algorithm that decomposes it to different modes. The cumulative energy of the most significant mode is being computed and used as a fault detection index. The proposed scheme is tested for pole to pole and pole to ground fault with broad variation in fault location, fault resistance, and distributed generations penetration in grid-connected and islanding mode of microgrid operation. The performance of the proposed technique is compared with the existing differential current and overcurrent relaying scheme as well as other existing schemes. The testing has been done in MATLAB/Simulink and Typhoon hardware-in-loop testbed. The proposed scheme detects all types of fault with wide variation in fault and operating conditions of the microgrid with faster response time. The test results indicate that the proposed protection scheme is a potential candidate for providing effective protection measure for LVdc microgrid.