Go to CMS (admin) - System Management - Categories - Click on "Add New"
Give Name - This will show on front end/ Website.
Example - Kerala
URL - This will define the URL structure.
Example - /kerala
Description - This will work on SEO part.
Parent Category - When we want to create some parent - child relationship between the categories.
Example - Parent category is States:-
The child should be - Noida, Delhi, Mumbai, Kerala, Coimbatore etc.
So the URL structure should be :-