Transmission loss/cost allocation to the individual buses in a fair way is an essential issue in restructured electricity market. This paper splits active power transmission loss into two components namely real and reactive loss component. The real and reactive loss components are due to the real power transaction from the generator to the load and reactive power demand of the load respectively. The active power loss changes due to the reactive power loads and this increase in loss are allocated to the relevant loads based on load sensitivity factor (LSF). The loss allocation using LSF is a valid approach as it is derived from solved load flow solution. The cost allocation of real loss component to a transaction and reactive loss component to loads is based on the loss contribution fraction (LCF) and LSF respectively. The highlight of this paper is to allocate real loss component to the respective buses equally and to allocate the cost of reactive loss component to the respective loads in a fair way. This paper also presents a detailed discussion on impact of mathematical loss and comparison with four existing loss allocation methods. All the methods are discussed by considering with and without reactive power load. The effectiveness of the proposed approach is illustrated using a sample four bus and 30 bus IEEE system. © 2018 Elsevier Ltd