This study presents a novel differential protection algorithm (DPA) for power transformer using chirplet transform (ChT). The proposed method combines the features of biased restraint characteristic (BRC) of the conventional differential relay and out-turn of ChT in a two-stage algorithm. In the first stage, the BRC plane is divided into three zones: namely, high-set (HS), non-trip and vulnerable zones. The tripping decisions are carried out in the first two zones based on differential and biased current. However, if the operating condition of the power transformer falls in the vulnerable zone, then there is an ambiguity in discriminating internal fault, inrush current and current transformer saturation cases. Therefore, in the second stage, ChT is applied to differential current signal to obtain an energy distribution on the time-frequency plane with respect to time, frequency and chirp rate. Then, using the mean and standard deviation of the normalised energy, power transformer operating conditions are classified. Also, most of the DPAs available in the literature are system dependent. However, the proposed novel DPA can be effectively used for any system. The proposed scheme is validated for two power transformer systems using PSCAD to simulate various operating conditions and MATLAB to implement the algorithm.