In a power system, it is essential to retain the voltage under permissible limit and to deliver active power through transmission lines. This paper presents a method to identify the optimal location and sizing of capacitors in a system for refining the voltage profile and curtailing system losses. There are two important tasks to be accomplished in this work, one is to determine the size of the capacitor to be placed on the bus and the other is to determine the location of the capacitor in the system. Firstly, the size of the capacitors to be installed is estimated. Then, the calculation of power loss indices (PLI) is done with the help of the estimated size of capacitors. The PLI and per unit nodal voltage are given as input to the fuzzy expert system (FES) for determining the suitability index, which will decide the most suitable location for capacitor placement. Newton-Raphson method for load flow analysis is carried out to find the voltages at each node and the system losses. The overall reliability and accuracy of the proposed method is validated by testing on three different IEEE test bus systems.