The concept of microgrids has emerged as an effective way to integrate distributed energy resources (DERs) into distribution networks. The presence of DERs in microgrids leads to challenges in the formulation of protection for microgrids. Protection problems arise in a microgrid due to varying fault current levels in different operating scenarios. In order to overcome the practical challenges arising from varying fault current levels leading to short-circuit faults in microgrids, this paper proposes a MagnetoResistive (MR) sensors-based protection scheme, with fault localization through SuperimposedReactiveEnergy (SRE). The process is initiated by employing highly sensitive non-intrusive magnetic sensors to detect the magnetic field at each end of the distribution line. The magnetic field is then used to calculate the total harmonic distortion and thus detect faults in microgrids. After detection of faults, the proposed scheme uses SRE to identify faulty zones in microgrids. Finally, SI components of the current are extracted for fault classification. Extensive simulations on the International Electro-technical Commission (IEC) microgrid are performed in MATLAB/Simulink to validate the efficacy of the proposed scheme. Simulation results show that the proposed scheme can effectively detect, classify and isolate different faults in microgrids, while operating under various modes with varying fault locations and resistances, with the efficiency of approximately 97–98%.