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There are a number of legends connected with the origin of Diwali.  
But Diwali is widely celebrated as the day that Lord Rama returned triumphant to Ayodya after defeating Ravana.This aspect of Diwali is the most common and acceptable account with regards to the other origins of Diwali.

Main Legend:

RamaDiwali also celebrates the return of Lord Rama, King of Ayodhya, with his wife Sita and brother Lakshmana to Ayodhya from a war in which he killed the demon king Ravana. It is believed that the people lit oil lamps along the way to light their path in the darkness. This is the reason, why the festival is celebrated a day earlier in South India since Lord Rama travelled from the south to his kingdom in the north. In North India, the festival is held on the final day of the Vikram calendar. The following day marks the beginning of the North Indian new year, and is called Annakut.
 

 

Second Legend: In rural areas, Diwali signifies Harvest Festival. Diwali which occurs at the end of a cropping season has along with the above custom, a few others that reinforce the hypothesis of its having originated as a harvest.

Every harvest normally spelt prosperity. The celebration was first started in India by farmers after they reaped their harvests. They celebrated with joy and offered praises to God for granting them a good crop.

Third Legend:  

KrishanIt commemorates the killing of Narakasura, an evil demon who created havoc, by Lord Krishna’s wife Satyabhama. This happened in the Dwapara Yuga during this time of Lord Krishna’s avatar. In another version, the demon was killed by Lord Krishna himself. Before Narakasura’s death, he requested a boon from his mother, Satyabhama (believed to be an Avatar of Bhudevi - Narakasura’ mother), that everyone should celebrate his death with colorful light.

It is interesting to note that Bhudevi, mother of the slain Narakasura, declared that his death should not be a day of mourning but an occasion to celebrate and rejoice. Since then, Deepavali is being celebrated by people every year with joyous celebrations with lot of fun and frolic, and fire works.

Fourth Legend:

LakshmiOn this day Mother Lakshmi emerged from the ocean of milk called the Ksheer Sagar. She brought with Her wealth and prosperity for mankind.

On that day, Lakshmi Pooja was performed to honour Her and as such, every year on Diwali day, Hindus perform Her prayer and worship.The making and distribution of various sweets and total vegetarian foods are the order of the day.This practice is alive and well to this very day.

Many people believe that Lakshmi, the Goddess of wealth and good fortune, visit the homes of devotees on this day.  Worship of Lakshmi is performed in the evening.

According to the Skanda Purana, the goddess Shakti observed 21 days of austerity starting from ashtami of shukla paksha (eighth day of the waxing period of moon) to get half of the body of Lord Shiva. This vrata (austerity) is known as kedhara vrata. Deepavali is the completion day of this austerity. This is the day Lord Shiva accepted Shakti into the left half of the form and appeared as Ardhanarishvara. The ardent devotees observe this 21 days vrata by making a kalasha with 21 threads on it and 21 types of offerings for 35 days. The final day is celebrated as kedhara gauri vrata.
 

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