Step 1: Recall fact. Vembanad Lake is India's longest lake, stretching over 96 km.
Step 2: Location. It lies in Kerala and forms a significant part of the famous Kerala backwaters.
Step 3: Importance. The annual Nehru Trophy Boat Race is held here, making it both culturally and economically important.
Step 4: Conclude. Thus, the correct location is Kerala.
\[
\boxed{\text{Kerala}}
\]