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Interturn faults are a significant problem in power transformers that can eventually burgeon into catastrophic faults and likely result in an overall network failure. The main problem with SFRA as one of the well-recognized diagnostic tools for detecting winding faults is its restriction to the domain of offline testing since the method requires injection of a test signal into the transformer windings through the high-voltage bushings. To address the difficulties arising from this issue, in this contribution, a new technique for online transfer function monitoring of the power transformers windings through a quite simple, economic, and noninvasive capacitive sensor installed on the surface of the transformer bushing is presented. Interturn faults with various levels of severity were imposed on the winding of a 35-kV/400-V, 100-kVA oil-immersed distribution transformer to evaluate the feasibility and sensitivity of the method. The experimental results proved that the newly developed online monitoring system is feasible and sensitive to detect unambiguously interturn faults even down to 0.2% shorted turns along the winding. As such, the proposed approach in this paper enables timely warning of a rising failure and serves a better purpose in assessing the health of a faulty transformer.