Holi is the festival of colors. This is observed in a grand fashion in India. However not many know the traditional significance of this festival.
After dakshayAga(1), shakti took the form of the daughter of the mountain king himavAn called pArvatI. From the early childhood she was devoted to Lord shiva and started penance for getting married to the God shiva. Lord shiva was however staying as dakshiNAmUrthi (2) making the sages sanaka, sanandana, sanAtana, sanatkumAra realize the Ultimate Truth.
In the meanwhile the celestials were put to deep hardship by the demons lead by sUrapadma, simhamukha and tharaka. This was a curse on them for attending the dakshayAga. sUrapadma had the boon that none other than the son who is the power of shiva could kill him. As Lord shiva was teaching the path of Bliss to the sages and pArvati doing penance, the celestials were desparate for the solution which is the son of Lord shiva. Out of the desperation, they lost the sense of what they were doing and sent forcibly the kAma (cupid) to induce lust in God for pArvatI.
kAma, whose arrows never failed elsewhere, was sure that he was getting into trouble. However out of pressure from the celestials (devas) he went to the abode of Lord shiva and shot an arrow that would kindle lust on the God. kAma has been vested with the power by Lord shiva to induce lust in all creatures - lives in order to maintain the reproduction as a system, so he was successful. Will that logic work on the One Who is beyond all these principles, the One Who has no pleasure out of external things? The arrow of kAma failed to induce lust in God. As the Lord opened slightly the third-eye, kAma who shot the arrow was burnt down to a heap of ash. Unperturbed the Lord continued the explanation to the sages!
This incident of burning off kAma is called kAmadahana or Holi. The posture of God burning kAma is called kAma dahana mUrthi (3) and is one of the 25 mAhEshvara mUrthis (4).
As the lust was won over by the Eternal Bliss of Lord shiva the kAmadahana or Holi festival is celebrated as an event associating with the Bliss of God. The Holi bonfire is in commemoration of this event. The ash of kAma's body settled over the Lord shiva. (The kAma dahana mUrthi dhyAna shloa states, bhasma uddhULita vigraham). So following kAmadahana during holi, people put the powders on themselves and others remembering this victory over lust. To this day, people offer sandalwood paste to Kamadeva to relieve from his stinging burns and mango blossoms that he loved on Holi.
The purANa continues that later the celestials realized their foolishness in trying to alter the course of God by force and smartness. They begged to God for pardon and pleaded to revive kAma. They further begged that the Lord accept pArvati as the consort and put an end to their sufferings from the demons. The highly benevalent Lord accepted their prayers and married pArvati. On the day of wedding revived kAma but made him invisible except for the eyes of his wife rati, making him ananga. This day of pArvatI parameshvara wedding is the kalyANa vratam(5) also known as panguNi uttaram
kAmadahana festival is celebrated in the month of mAsi (mid Feb to mid Mar) on the full moon day.