A system and method for detecting a phase-to-ground fault in an AC electrical machine operates to receive measurements of three-phase voltages and currents provided to the AC electrical machine, compute at least one of a zero sequence component and a negative sequence component of voltage and current from the three-phase voltages and currents, and calculate a fault severity index (FSI) based on the zero or negative sequence component of voltage and current, so as to identify a phase-to-ground fault in the AC electrical machine. Calculating the FSI further includes determining a total value of the zero or negative sequence current, determining a noise-contributed value of the zero or negative sequence current included in the total value, determining a compensated value of the zero or negative sequence current based on the total value and the noise-contributed value, and calculating the FSI based on the compensated value.