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The Kailasha temple is located in the caves of Ellora. The Ellora caves are a UNESCO World Heritage Site located in the state of Maharashtra, India. It is a complex of rock-cut caves that were carved out of the Charanandri Hills during the 6th and 9th centuries. The caves of Ellora are known for their intricate carvings and sculptures, showcasing a fusion of Hindu, Buddhist, and Jain art and architecture.
Option 1, Ajanta, is not the correct answer. The Ajanta caves are also located in Maharashtra, but they are known for their Buddhist cave temples, not the Kailasha temple.
Option 3, Elephanta, is also incorrect. The Elephanta caves are located on an island in Mumbai Harbor and are known for their cave temples dedicated to Lord Shiva.
Option 4, Karla, is also not correct. The Karla caves are located in Maharashtra, but they are Buddhist caves and do not house the Kailasha temple.
Therefore, the correct answer is option 2, Ellora.