The myth concerning this day is related to a fierce demon king by the name of Narakasur, who was the king of Pragjyotishpur, a place south of the present day Nepal. He had defeated Lord Indra in a fierce battle and taken away the earrings of Goddess Aditi. Goddess Aditi happened to be related to Lord Krishna’s wife, Satyabhama. Besides the earrings, Narakasur had also imprisoned sixteen thousand girls who were the daughters of different gods and saints.
When Satyabhama came to know about it, she was furious and sought the help of her husband, Lord Krishna. She asked for the empowerment, so that she could vanquish the demon herself. Lord Krishna was aware that Narakasur was cursed to die in the hands of only a woman, so this empowerment was necessary. Krishna, empowered her, and also decided to act as her charioteer in the battle against Narakasur.
On the day prior to Narak Chaturdashi, with the help of Lord Krishna, Satyabhama manages to not only kill Narakasur but also recovered the precious earrings. She also releases the sixteen thousand girls. However, to save the girls the embarrassment of being in the confines of a demon, Lord Krishna decided to marry all of them, and grant them legitimacy.
As a mark of victory, Krishna smeared his forehead with the blood of Narakasur and when he arrived the next day, his wives massaged him with perfumed oils and gave him a royal bath.
Since then it has become a custom in parts of Maharashtra, to get up early on the day of Narak Chaturdashi and have an oil-bath before sunrise. Many apply kumkum on their foreheads, as a ritual before the bath, imitating the smearing of the blood of Narakasur by Lord Krishna.
The myth further states that Bhoodevi (Mother earth) who was the mother of Narakasur, declared this day as a day of celebrations and not mourning. Thus this day is celebrated as Chhoti Diwali!