I recently had to hack through a server and Wordpress to get permalinks to look good and function. Here’s my solution;

Found this answer on Stackoverflow:

add this and remove any non-specific rewrite rules:

  try_files $uri $uri/  /index.php; 
 

The only thing missing was where to put that line of code. This post pointed me to insert that line before the first location declaration.

Once I did that, then I restarted the Nginx daemon with:

 sudo service nginx restart 

The I went into the permalinks section of the Wordpress installation.  The permalink setting I like is the “Post Name” setting.  Choosing that radio button sets the url structure as:

 /index.php/%postname%/ 

Unfortunately this setting still returns 404’s when you enter the structure of the site.  I then chose the “Custom Structure” radio button and deleted the index section of the structure to get:

 /%postname%/ 

Then you get happy pretty urls!