There was a mighty demon king named Hirnakashyipu who had won all the three worlds of heaven, earth and hell and had thus, become very proud.He went to the extent that he had enforced a law that everybody would worship him instead of gods and deities. However, his little son Prahlad refused to accept his commands and continued to worship God.
Flustered by this news, Hirnakashyipu invoked the help of his sister Holika, who had a boon that she could walk through the fire unharmed to do away with his son. The wicked aunt agreed to the evil desires of his brother and entered the fire with her nephew Prahlad.
However, the brother and sister had forgot that Holika could only enter the fire alone or she would perish. Thus, blessed by God, the child Prahlad remained unharmed but Holika got burnt and died instantly. Holi is thus celebrated to commemorate the death of the evil aunt, after whom the festival is named, and the new life granted to Prahlad for his devotion and faith.