Gzip compression reduces response body size before transmission, significantly decreasing bandwidth usage and improving page load times especially for text-based files like HTML, CSS, JavaScript, and JSON. Compression is particularly effective for text content which typically compresses to 60-80% smaller sizes. The gzip on directive enables the compression module, which operates transparently to clients that support compression via the Accept-Encoding: gzip request header.

The gzip_comp_level directive controls compression ratio versus CPU usage, ranging from 1 (fastest, least compression) to 9 (slowest, maximum compression). Levels 3-5 provide optimal balance for most scenarios, as higher levels provide diminishing returns while consuming significantly more CPU. The gzip_min_length directive prevents compressing very small files where compression overhead might actually increase size, with 256 bytes being a common threshold.

The gzip_types directive specifies MIME types eligible for compression, with text/html always compressed when gzip is enabled. Binary formats like images (JPEG, PNG) and videos should be excluded as they are already compressed and won't benefit. The gzip_vary on directive adds the Vary: Accept-Encoding header, instructing caching proxies to maintain separate cached versions for compressed and uncompressed responses. The gzip_proxied directive controls compression for proxied requests, with any enabling compression regardless of proxy headers.