One there was a demon king by the name of Hiranyakashyap who won over the kingdom of earth. He was so egoistic that he commanded everyone in kingdom to worship only him. But his son, Prahlad became devotee of Lord Narayana and He refused to worship his father Hiranyakashyap.
Hiranyakashyap tried many ways to kill his own son Prahlad but Lord Narayana saved him every time. Finally, Hiranyakashyap asked his sister, Holika to enter a blazing fire with Prahlad in her lap. Because Hiranyakashyap knew that Holika had a boon, whereby, she could enter the fire unscathed.
Holika coaxed young Prahlad to sit in her lap and she herself took her seat in a blazing fire.Holika had to pay the price of her sinister desire by her life. because she was not aware that the boon worked only when she entered the fire alone.
Prahlad, who kept chanting the name of Lord Naarayana all this while, came out unharmed, as the lord blessed him for his extreme devotion.
Thus, Holi derives its name from Holika. And, is celebrated as a festival of victory of good over evil.
Holi is also celebrated as the triumph of a devotee. As the legend depicts that anybody, howsoever strong, cannot harm a true devotee. And, those who dare torture a true devotee of god shall be reduced to ashes.
Even today, people enact the scene of 'Holika's burning to ashes' every year to mark the victory of good over evil.