King Mahabali was the grandson of the good daitya (a type of demon), Prahlada. Having conquered the Earth and Svarga, he had become arrogant. The gods appealed to Lord Vishnu to reclaim Svarga from Bali's rule. Vishnu incarnated as Vamana, the dwarf son of Sage Kashyapa and Aditi, the parents of Indra, Surya, and Varuna.

Once, King Mahabali, or Bali, decided to conduct a grand yagya (sacrifice) and announced that all the attendees would be given gifts of their choosing. When Vamana arrived at the ceremony, Bali welcomed him with great respect and asked him what he desired. 

"I want only three paces of land," said Vamana. 

Bali looked at the dwarf's tiny feet in amusement but nevertheless pledged to fulfill his request. 

Just then, Shukracharya, the daitya guru, intervened. "Asura King, retract your promise. This beggar is none other than Vishnu, who has come to steal your kingdom."

"Breaking one's promise is worse than losing one's kingdom," replied Bali. "Besides, if this is really Lord Vishnu, I am honored that he has come to ask me for alms."

To finalize the gift, Bali needed to pour water from a kamandalu (ceremonial pot) to perform the sankalpa (ritual vow). To save Bali, Shukracharya assumed the form of a small insect and tried to block the spout of the kamandalu to prevent the donation. Vamana cleared the spout with a sharp blade of grass, blinding Shukracharya permanently in his left eye. 

"You may measure three steps of land with your feet," Bali then told Vamana.

Upon this, Vamana began to grow and soon reached cosmic proportions. With his first step, he covered the entire Earth; with his second, Svarga. Vamana then asked Bali where he should place his foot next for the third step. Bali's arrogance crumbled. For Vamana's third step, he offered his own head.

Vamana stepped on Bali's head and pushed him to Sutala, a netherworld realm. Pleased with Bali's humility and unwavering devotion, Vamana granted him immortality and sovereignty in Sutala. He also allowed him to return to his people once every year—celebrated in Kerala as Onam.

Sources

1. 151 Ramayanada Kathegalu (Kannada book) by Vasantha Prakashana

2. Jai Ganga Maiya (2003 Hindi TV serial) by Ramanand Sagar