In deregulated electricity market, economic allocation of transmission loss to the generators and the loads in a fair way is a tremendous challenge for power engineers. This paper presents a methodology to price the real power loss due to bilateral contracts considering reactive power drawn by the loads. The real power loss is divided into two components namely transaction loss component and reactive power loss component. Transaction loss component is due to the bilateral contracts and reactive power loss component is due to the reactive power demand of the loads. Based on transaction loss factor and reactive power loss factor the total cost for real power loss is allocated to both generators and loads. Transaction loss factor depends on quantum of real power generation and load and hence cost of transaction loss component is shared among the generators and the loads equally. Reactive power loss factor depends on quantum of reactive power demand of the loads and hence cost of reactive power loss component is allocated to the loads. The results of the proposed approach in comparison with other loss allocation methods are presented using an IEEE 30 bus system. The simulation is carried out using MATLAB R2014a. © 2017 IEEE.