Can't find any reliable citations for this, but I have mostly heard about this from my parents and elders.
Coconut breaking is a symbolic act of submitting oneself completely to the almighty. Before starting anything good/big (ex: foundation stone of buildings, buying a new car etc), coconuts are offered.
Coconut is also known as "Sriphal", or Gods fruit. It is considered as the purest form of offering to God, since the milk and the white kernel is not polluted due to the hard outer shell. (Again, I don't have any reliable citations for this)
The coconut itself symbolizes one's own head, specifically the person's ego. In the process of breaking the coconut, the person let's go of his ego and pride which he might have achieved or is going to achieve. When the ego is broken, only then you can taste the sweet milk of success, or the fruit itself.
Update: Although I couldn't find any authentic citations, here are a few blogs and threads who have written about it. I only know this from my parents and elders.
When we offer prayers to God, we are supposed to be in a state of humility. There are three 'malam's (dirt) hindering our vision in seeking God, namely, anava, kanma and maya. To signify that we have removed these 'malams' we offer coconut, removing its outer cover, husk inside and cracking the shell ( three malams) we show to Lord the kernel inside which is clean and white as our soul and requesting him for his refuge and save us.
Coconut and Banana are 'pure' fruits - They do not grow from seed discarded after eating (which is ucchishtam, or remains of mouth of humans).
Coconut tree only grows from full unopened coconut planted in ground.
Banana tree only grows at foot of another banana tree.
So these are offered to God, as pure/virgin/unblemished items.
When offering something to Bhagavan, aradhaka (priests) think of him like a child - the banana is peeled (can you eat skin of banana), the hot milk is cooled down, the food is not smelled by anyone (smelling = tasting = ucchistam), and coconut is broken (how can anyone eat outer shell of coconut) ?
A time ago, Hindus observed that they weren't able to provide a living sacrifice to their Gods due to the pain and the negativity involved with it. They decided to use the coconut fruit as its replacement which made an excellent alternative due to the presence of a face upon it. That is why, it has been called the "God's fruit".
Coconut is called God's fruit as it has three distinct eyes and hence relates to the three eyes of Lord Shiva representing the holy Trinity of Evolution: Creation, Preservation and Destruction.
Also the trinity of Ego, Maya and Karma, these three gives rise to obstacles, hence it become auspicious to break these.
Only when maya/ego is smashed away one can taste the sweet untouched nectar of spiritual purity and bliss.
Act of breaking coconut thus become both, ritual as well as spiritual exercise.
Life is nothing but nothing but thoughts generated from brain, Happiness,unhappiness,like dislike, anger, fear, Greedy etc.
When you are free from these thoughts
( Yoga - Padhanjali suthra 1.2)
You can realise athma
Padhanjali Suthra - 1.3
Athma is god dwells in one's heart Kada upanishad - 2.1.7, Dhaithriya uapanishad 1.6.1,
Pragadharanya Upanishad - 1.4.9-10
Combining all these You can realise God You have to kill/sacrifice/remove thoughts.
Thoughts are covered by three malas (Dirt) Ego (Anava) Greediness (Kanmam) Illusion (Maya).
Coconut is covered by three 1. Fibre( Ego), 2. Pith (Greediness)- these two are in combined state. 3. Shell (Maya) - Very hard to remove. Inside white kernel(Brain- which is having millions of thoughts Like coconut is having milk/Oil)
To realise God sacrifice your thoughts- Remove Fibre,Pith and Break shell and submit the white kernel of the coconut to God, That is thoughts about God.
Before knowig about coconut breaking, you should know what a temple is and why we go to temple..Without knowing this you will not be able to grasp the whole mechanish.its liks an ice berge.. a lot of things beneath.. But I will try to explain as simple as I can.
A hindu temple represents a human body or vice versa.. etham sareeran kauntheya kshetramityabhideeyathae...(Bhagavath Geetha..)..
We have 6 aadhara chakras..Mooladhara, swadhisthana, Manipuraka, Anahatha, Vishudha, Aajna and all above the Sahasraara...
The serpent power - Kundalini is in a dormant stage in the mooladhara. If his power is awakened we will be in another state of super consciousness. The idea of all worships are to attain this state.Sath..Chit..Ananadam.
All these chakras are associated to the temple vighraha or Daiety..To awaken the sleeping setpent power..kundilini.we break the coconut at the root chakra..mooldhara. The explosion of breaking coconut gives a jerk to start the serpent power. The God for mooladhara is Ganesh and so mostly this is done in Ganesh temples.
Then there are others perceptions for coconut...It resembles our body. Which has the 3 states- Sthola...Sookshma.. and Kaarana... sareera.( Physical body....Energy body ..and the soul or knowledge body ). The outer shell represents the Physical body...inner kernel the Energy body and the sweet water and space in the innermost is the soul body.
Once the outer body breaks the Ego is gone and pure energy and Bliss ( Knowledge) prevails.
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