Fine-grained permissions provide detailed control over access to resources within a system, allowing specific permissions for individual elements rather than broad access. They work by defining explicit access rules based on factors such as user role, resource type, and contextual conditions. The main benefits of fine-grained permissions include improved security, data privacy, and regulatory compliance. However, challenges include increased complexity, higher administrative overhead, potential system performance impacts, and difficult troubleshooting. Fine-grained permissions are best used for sensitive information or strict regulatory requirements, while coarse-grained permissions may be better for less sensitive systems where ease of management is a priority. Best practices for implementing fine-grained permissions include starting with a clear access control policy, employing the principle of least privilege, regularly reviewing and updating permissions, automating permissions management where possible, and monitoring and logging access.