Holy water is water which is blessed. It is used as a reminder of our baptism.
It is blessed with salt using the following formula (although an older formula is available), which also explains the purpose:
All make the sign of the cross
Priest: May God who has given us a new birth in Christ by water and the Holy Spirit be with you all.
Response: And with your spirit.
P: By this blessing of water, we recall the sacrament of baptism in which by water and the Holy Spirit we were reborn. Everytime we are sprinkled with this water or we use it in making the sign of the cross upon entering the church and in our prayer at home, we give thanks to God for his gifts beyond human telling and we implore his help so that we may live up to the sacrament which we have received by faith.
Reading from the Gospel according to John (7:37-39)
Prayer of Blessing
P: Let us pray. Lord, holy Father, look upon us who were redeemed though your Son and were reborn at the baptismal font and grant that those who would be sprinkled by this water may be renewed in body and mind and may offer you pure service through Christ our Lord together with the Holy Spirit for ever and ever. Amen.
If salt is added, the priest blesses the salt using the following prayer:
P: Almighty God, we ask you to bless + this salt as once you blessed the salt scattered over the water by the prophet Elisha1. Wherever this salt and water are sprinkled, drive away the power of evil and protect us always by the presence of your Holy Spirit. Grant this through Christ our Lord. Amen.
He adds the salt to the water.
He sprinkles the water over the people as he says:
P: Let this water call to mind our baptism into Christ, who by his death and resurrection has redeemed us. Amen.
Salt is added because salt is a purifying agent against evil2 (as indicated in the prayer) and it may help to stop the water going off.
1: See II Kings 2, Elisha healing the waters of Jericho.
2: Hence the custom of throwing salt over one's left shoulder, into the face of the devil sitting there.