The fact that software offers certain possibilities of markup does not mean that you should use them. A good example is underlining. To my knowledge all software allows underlining of text; nevertheless underlining is not longer used in professional publications from newspapers to magazines to books since the demise of the typewriter.
That said, indentation has two main uses in regular prose texts:
- to identify the beginning of a paragraph, and
- to mark long quotes
Usually the vertical distance between paragraphs is the same as that between the lines within one paragraph. If the last line of one paragraph ends close to or at the right margin, it is hard if not impossible to discern wether or not the next sentence continues the present paragraph or is the first in a new one. If you indent this sentence, the paragraph beginning becomes unmistakeable.
For the same reason, you never indent the first line in the first paragraph of a chapter, because it is already clear from the chapter heading that a new paragraph starts here.
Vertical spacing is used to:
- separate subchapters, and
- mark long quotes
If you want to divide your text into sections that are smaller than chapters but longer than paragraphs, you can use a large space to separate these sections. Sometimes a narrow horizontal rule or three asterisks or some ornament are added to the space dividing these sections of text. Especially the three asterisks, which echo the three dots of an ellipsis, are used when there is a jump forward in time and the story continues after a summary of the events that were not narrated.
A common rule says that quotes longer than 40 words should be indented (sometimes from both sides) and separated from the main text with a space above and below. Some style guides even ask for smaller type size. In narrative text this is used to mark up letters, newspaper articles, graffitti etc. that the protagonist encounters and reads.
How deep an indentation, or how large a space separating subchapters should be, is a design question and has no universal rules.