I always split at the chapter level, (for which I use <h2>), and then only split chapters further if the XHTML file size exceeds 64K since my aging PRS-300 slows down as filesize increases. (Note, however, that splitting a book into too many small files can have a detrimental impact on performance. See
https://www.mobileread.com/forums/sho...d.php?t=212892)
The PRS-300 supports 3-levels in the NCX which does help with navigation. (No idea if 3-levels is typical for most readers.)
For books with a rich outline structure I sometimes add a separate XHTML file which lists and links to all the H2, H3 and H4 elements in the book.