diff --git a/cl/clparams/config.go b/cl/clparams/config.go
index 89ddc13a06f..06558cd1dfc 100644
--- a/cl/clparams/config.go
+++ b/cl/clparams/config.go
@@ -446,6 +446,14 @@ func configForkNames(b *BeaconChainConfig) map[[VersionLength]byte]string {
 	return fvn
 }
 
+func (b *BeaconChainConfig) ParticipationWeights() []uint64 {
+	return []uint64{
+		b.TimelySourceWeight,
+		b.TimelyTargetWeight,
+		b.TimelyHeadWeight,
+	}
+}
+
 var MainnetBeaconConfig BeaconChainConfig = BeaconChainConfig{
 	// Constants (Non-configurable)
 	FarFutureEpoch:           math.MaxUint64,
diff --git a/cl/utils/bytes.go b/cl/utils/bytes.go
index df9989260c3..13e7c2bc7f9 100644
--- a/cl/utils/bytes.go
+++ b/cl/utils/bytes.go
@@ -83,6 +83,20 @@ func DecodeSSZSnappy(dst ssz_utils.Unmarshaler, src []byte) error {
 	return nil
 }
 
+func DecodeSSZSnappyWithVersion(dst ssz_utils.Unmarshaler, src []byte, version int) error {
+	dec, err := snappy.Decode(nil, src)
+	if err != nil {
+		return err
+	}
+
+	err = dst.DecodeSSZWithVersion(dec, version)
+	if err != nil {
+		return err
+	}
+
+	return nil
+}
+
 func CompressZstd(b []byte) []byte {
 	wr, err := zstd.NewWriter(nil)
 	if err != nil {
diff --git a/cmd/erigon-cl/core/state/accessors.go b/cmd/erigon-cl/core/state/accessors.go
index c5b946fabfc..05394e28613 100644
--- a/cmd/erigon-cl/core/state/accessors.go
+++ b/cmd/erigon-cl/core/state/accessors.go
@@ -13,6 +13,8 @@ import (
 	eth2_shuffle "github.com/protolambda/eth2-shuffle"
 )
 
+const PreAllocatedRewardsAndPenalties = 8192
+
 // GetActiveValidatorsIndices returns the list of validator indices active for the given epoch.
 func (b *BeaconState) GetActiveValidatorsIndices(epoch uint64) (indicies []uint64) {
 	if cachedIndicies, ok := b.activeValidatorsCache.Get(epoch); ok {
@@ -92,11 +94,11 @@ func (b *BeaconState) GetTotalBalance(validatorSet []uint64) (uint64, error) {
 }
 
 // GetTotalActiveBalance return the sum of all balances within active validators.
-func (b *BeaconState) GetTotalActiveBalance() (uint64, error) {
+func (b *BeaconState) GetTotalActiveBalance() uint64 {
 	if b.totalActiveBalanceCache < b.beaconConfig.EffectiveBalanceIncrement {
-		return b.beaconConfig.EffectiveBalanceIncrement, nil
+		return b.beaconConfig.EffectiveBalanceIncrement
 	}
-	return b.totalActiveBalanceCache, nil
+	return b.totalActiveBalanceCache
 }
 
 // GetTotalSlashingAmount return the sum of all slashings.
@@ -267,7 +269,7 @@ func (b *BeaconState) BaseReward(totalActiveBalance, index uint64) (uint64, erro
 
 // SyncRewards returns the proposer reward and the sync participant reward given the total active balance in state.
 func (b *BeaconState) SyncRewards() (proposerReward, participantReward uint64, err error) {
-	activeBalance, err := b.GetTotalActiveBalance()
+	activeBalance := b.GetTotalActiveBalance()
 	if err != nil {
 		return 0, 0, err
 	}
@@ -400,3 +402,129 @@ func (b *BeaconState) GetAttestingIndicies(attestation *cltypes.AttestationData,
 	}
 	return attestingIndices, nil
 }
+
+// Implementation of get_eligible_validator_indices as defined in the eth 2.0 specs.
+func (b *BeaconState) EligibleValidatorsIndicies() (eligibleValidators []uint64) {
+	eligibleValidators = make([]uint64, 0, len(b.validators))
+	previousEpoch := b.PreviousEpoch()
+	// TODO(Giulio2002): Proper caching
+	for i, validator := range b.validators {
+		if validator.Active(previousEpoch) || (validator.Slashed && previousEpoch+1 < validator.WithdrawableEpoch) {
+			eligibleValidators = append(eligibleValidators, uint64(i))
+		}
+	}
+	return
+}
+
+// Implementation of is_in_inactivity_leak. tells us if network is in danger pretty much. defined in ETH 2.0 specs.
+func (b *BeaconState) inactivityLeaking() bool {
+	return (b.PreviousEpoch() - b.finalizedCheckpoint.Epoch) > b.beaconConfig.MinEpochsToInactivityPenalty
+}
+
+// Implementation defined in ETH 2.0 specs: https://github.com/ethereum/consensus-specs/blob/dev/specs/altair/beacon-chain.md#get_flag_index_deltas.
+// Although giulio made it efficient hopefully. results will be written in the input map.
+func (b *BeaconState) processFlagIndexDeltas(flagIdx int, balanceDeltaMap map[uint64]int64, eligibleValidators []uint64) (err error) {
+	// Initialize variables
+	var (
+		unslashedParticipatingIndicies     []uint64
+		unslashedParticipatingTotalBalance uint64
+		baseReward                         uint64
+	)
+	// Find unslashedParticipatingIndicies for this specific flag index.
+	previousEpoch := b.PreviousEpoch()
+	unslashedParticipatingIndicies, err = b.GetUnslashedParticipatingIndices(flagIdx, previousEpoch)
+	if err != nil {
+		return
+	}
+	// Find current weight for flag index.
+	weights := b.beaconConfig.ParticipationWeights()
+	weight := weights[flagIdx]
+	// Compute participating indices total balance (required in rewards/penalties computation).
+	unslashedParticipatingTotalBalance, err = b.GetTotalBalance(unslashedParticipatingIndicies)
+	if err != nil {
+		return
+	}
+	// Make it a map to make the existence check O(1) time-complexity.
+	isUnslashedParticipatingIndicies := make(map[uint64]struct{})
+	for _, index := range unslashedParticipatingIndicies {
+		isUnslashedParticipatingIndicies[index] = struct{}{}
+	}
+	// Compute relative increments.
+	unslashedParticipatingIncrements := unslashedParticipatingTotalBalance / b.beaconConfig.EffectiveBalanceIncrement
+	activeIncrements := b.GetTotalActiveBalance() / b.beaconConfig.EffectiveBalanceIncrement
+	totalActiveBalance := b.GetTotalActiveBalance()
+	// Now process deltas and whats nots.
+	for _, index := range eligibleValidators {
+		if _, ok := isUnslashedParticipatingIndicies[index]; ok {
+			if b.inactivityLeaking() {
+				continue
+			}
+			rewardNumerator := baseReward * weight * unslashedParticipatingIncrements
+			balanceDeltaMap[index] += int64(rewardNumerator / (activeIncrements * b.beaconConfig.WeightDenominator))
+		} else if flagIdx != int(b.beaconConfig.TimelyHeadFlagIndex) {
+			baseReward, err = b.BaseReward(totalActiveBalance, index)
+			if err != nil {
+				return
+			}
+			balanceDeltaMap[index] -= int64(baseReward * weight / b.beaconConfig.WeightDenominator)
+		}
+	}
+	return
+}
+
+// Implemention defined in https://github.com/ethereum/consensus-specs/blob/dev/specs/altair/beacon-chain.md#modified-get_inactivity_penalty_deltas.
+func (b *BeaconState) processInactivityDeltas(balanceDeltaMap map[uint64]int64, eligibleValidators []uint64) (err error) {
+	var (
+		unslashedParticipatingIndicies []uint64
+		validator                      cltypes.Validator
+	)
+	// Find unslashedParticipatingIndicies for this specific flag index.
+	previousEpoch := b.PreviousEpoch()
+	unslashedParticipatingIndicies, err = b.GetUnslashedParticipatingIndices(int(b.beaconConfig.TimelyHeadFlagIndex), previousEpoch)
+	if err != nil {
+		return
+	}
+	// Make it a map to make the existence check O(1) time-complexity.
+	isUnslashedParticipatingIndicies := make(map[uint64]struct{})
+	for _, index := range unslashedParticipatingIndicies {
+		isUnslashedParticipatingIndicies[index] = struct{}{}
+	}
+	// retrieve penalty quotient based on fork
+	var penaltyQuotient uint64
+	switch b.version {
+	case clparams.Phase0Version:
+		penaltyQuotient = b.beaconConfig.InactivityPenaltyQuotient
+	case clparams.AltairVersion:
+		penaltyQuotient = b.beaconConfig.InactivityPenaltyQuotientAltair
+	case clparams.BellatrixVersion:
+		penaltyQuotient = b.beaconConfig.InactivityPenaltyQuotientBellatrix
+	}
+	for _, index := range eligibleValidators {
+		if _, ok := isUnslashedParticipatingIndicies[index]; ok {
+			continue
+		}
+		// Process inactivity penalties.
+		validator, err = b.ValidatorAt(int(index))
+		if err != nil {
+			return err
+		}
+		penaltyNumerator := validator.EffectiveBalance * b.inactivityScores[index]
+		balanceDeltaMap[index] -= int64(penaltyNumerator / (b.beaconConfig.InactivityScoreBias * penaltyQuotient))
+	}
+	return
+}
+
+// BalanceDeltas return the delta for each validator index.
+func (b *BeaconState) BalanceDeltas() (balanceDeltaMap map[uint64]int64, err error) {
+	balanceDeltaMap = map[uint64]int64{}
+	eligibleValidators := b.EligibleValidatorsIndicies()
+	// process each flag indexes by weight.
+	for i := range b.beaconConfig.ParticipationWeights() {
+		if err = b.processFlagIndexDeltas(i, balanceDeltaMap, eligibleValidators); err != nil {
+			return
+		}
+	}
+	// process inactivity scores now.
+	err = b.processInactivityDeltas(balanceDeltaMap, eligibleValidators)
+	return
+}
diff --git a/cmd/erigon-cl/core/state/accessors_test.go b/cmd/erigon-cl/core/state/accessors_test.go
index 82a044f3752..9aa08e68c20 100644
--- a/cmd/erigon-cl/core/state/accessors_test.go
+++ b/cmd/erigon-cl/core/state/accessors_test.go
@@ -57,9 +57,7 @@ func TestActiveValidatorIndices(t *testing.T) {
 	require.NoError(t, err)
 	require.Equal(t, set, []uint64{1})
 	// Check if balances are retrieved correctly
-	totalBalance, err := testState.GetTotalActiveBalance()
-	require.NoError(t, err)
-	require.Equal(t, totalBalance, uint64(2e9))
+	require.Equal(t, testState.GetTotalActiveBalance(), uint64(2e9))
 }
 
 func TestGetBlockRoot(t *testing.T) {
diff --git a/cmd/erigon-cl/core/state/mutators.go b/cmd/erigon-cl/core/state/mutators.go
index 51ac7f55a97..f5d218e8bdb 100644
--- a/cmd/erigon-cl/core/state/mutators.go
+++ b/cmd/erigon-cl/core/state/mutators.go
@@ -4,12 +4,12 @@ import (
 	"fmt"
 )
 
-func (b *BeaconState) IncreaseBalance(index int, delta uint64) error {
-	currentBalance, err := b.ValidatorBalance(index)
+func (b *BeaconState) IncreaseBalance(index, delta uint64) error {
+	currentBalance, err := b.ValidatorBalance(int(index))
 	if err != nil {
 		return err
 	}
-	return b.SetValidatorBalance(index, currentBalance+delta)
+	return b.SetValidatorBalance(int(index), currentBalance+delta)
 }
 
 func (b *BeaconState) DecreaseBalance(index, delta uint64) error {
@@ -101,8 +101,8 @@ func (b *BeaconState) SlashValidator(slashedInd, whistleblowerInd uint64) error
 	}
 	whistleBlowerReward := newValidator.EffectiveBalance / b.beaconConfig.WhistleBlowerRewardQuotient
 	proposerReward := whistleBlowerReward / b.beaconConfig.ProposerRewardQuotient
-	if err := b.IncreaseBalance(int(proposerInd), proposerReward); err != nil {
+	if err := b.IncreaseBalance(proposerInd, proposerReward); err != nil {
 		return err
 	}
-	return b.IncreaseBalance(int(whistleblowerInd), whistleBlowerReward)
+	return b.IncreaseBalance(whistleblowerInd, whistleBlowerReward)
 }
diff --git a/cmd/erigon-cl/core/state/mutators_test.go b/cmd/erigon-cl/core/state/mutators_test.go
index b0bc171dd90..f6eb80e3be2 100644
--- a/cmd/erigon-cl/core/state/mutators_test.go
+++ b/cmd/erigon-cl/core/state/mutators_test.go
@@ -41,7 +41,7 @@ func TestIncreaseBalance(t *testing.T) {
 	testInd := uint64(42)
 	amount := uint64(100)
 	beforeBalance := state.Balances()[testInd]
-	state.IncreaseBalance(int(testInd), amount)
+	state.IncreaseBalance(testInd, amount)
 	afterBalance := state.Balances()[testInd]
 	require.Equal(t, afterBalance, beforeBalance+amount)
 }
diff --git a/cmd/erigon-cl/core/transition/finalization_and_justification.go b/cmd/erigon-cl/core/transition/finalization_and_justification.go
index d91d523e109..f3e545060a7 100644
--- a/cmd/erigon-cl/core/transition/finalization_and_justification.go
+++ b/cmd/erigon-cl/core/transition/finalization_and_justification.go
@@ -1,8 +1,6 @@
 package transition
 
 import (
-	"fmt"
-
 	"github.com/ledgerwatch/erigon/cl/clparams"
 	"github.com/ledgerwatch/erigon/cl/cltypes"
 )
@@ -87,11 +85,10 @@ func (s *StateTransistor) processJustificationBitsAndFinalityAltair() error {
 	if err != nil {
 		return err
 	}
-	totalActiveBalance, err := s.state.GetTotalActiveBalance()
+	totalActiveBalance := s.state.GetTotalActiveBalance()
 	if err != nil {
 		return err
 	}
-	fmt.Println(totalActiveBalance > 1000000000)
 	previousTargetBalance, err := s.state.GetTotalBalance(previousIndices)
 	if err != nil {
 		return err
diff --git a/cmd/erigon-cl/core/transition/operations.go b/cmd/erigon-cl/core/transition/operations.go
index f300a57f2d7..a67a178064d 100644
--- a/cmd/erigon-cl/core/transition/operations.go
+++ b/cmd/erigon-cl/core/transition/operations.go
@@ -240,7 +240,7 @@ func (s *StateTransistor) ProcessDeposit(deposit *cltypes.Deposit) error {
 		return nil
 	}
 	// Increase the balance if exists already
-	return s.state.IncreaseBalance(int(validatorIndex), amount)
+	return s.state.IncreaseBalance(validatorIndex, amount)
 
 }
 
diff --git a/cmd/erigon-cl/core/transition/process_attestations.go b/cmd/erigon-cl/core/transition/process_attestations.go
index ad6e657e60e..11f84273af7 100644
--- a/cmd/erigon-cl/core/transition/process_attestations.go
+++ b/cmd/erigon-cl/core/transition/process_attestations.go
@@ -28,16 +28,7 @@ func (s *StateTransistor) ProcessAttestations(attestations []*cltypes.Attestatio
 
 // ProcessAttestation takes an attestation and process it.
 func (s *StateTransistor) processAttestation(attestation *cltypes.Attestation) ([]uint64, error) {
-	participationFlagWeights := []uint64{
-		s.beaconConfig.TimelySourceWeight,
-		s.beaconConfig.TimelyTargetWeight,
-		s.beaconConfig.TimelyHeadWeight,
-	}
-
-	totalActiveBalance, err := s.state.GetTotalActiveBalance()
-	if err != nil {
-		return nil, err
-	}
+	totalActiveBalance := s.state.GetTotalActiveBalance()
 	data := attestation.Data
 	currentEpoch := s.state.Epoch()
 	previousEpoch := s.state.PreviousEpoch()
@@ -70,7 +61,7 @@ func (s *StateTransistor) processAttestation(attestation *cltypes.Attestation) (
 	}
 
 	for _, attesterIndex := range attestingIndicies {
-		for flagIndex, weight := range participationFlagWeights {
+		for flagIndex, weight := range s.beaconConfig.ParticipationWeights() {
 			if !slices.Contains(participationFlagsIndicies, uint8(flagIndex)) || epochParticipation[attesterIndex].HasFlag(flagIndex) {
 				continue
 			}
@@ -95,7 +86,7 @@ func (s *StateTransistor) processAttestation(attestation *cltypes.Attestation) (
 	}
 	proposerRewardDenominator := (s.beaconConfig.WeightDenominator - s.beaconConfig.ProposerWeight) * s.beaconConfig.WeightDenominator / s.beaconConfig.ProposerWeight
 	reward := proposerRewardNumerator / proposerRewardDenominator
-	return attestingIndicies, s.state.IncreaseBalance(int(proposer), reward)
+	return attestingIndicies, s.state.IncreaseBalance(proposer, reward)
 }
 
 type verifyAttestationWorkersResult struct {
diff --git a/cmd/erigon-cl/core/transition/process_rewards_and_penalties.go b/cmd/erigon-cl/core/transition/process_rewards_and_penalties.go
new file mode 100644
index 00000000000..7aeb8e1578d
--- /dev/null
+++ b/cmd/erigon-cl/core/transition/process_rewards_and_penalties.go
@@ -0,0 +1,25 @@
+package transition
+
+// ProcessRewardsAndPenalties applies rewards/penalties accumulated during previous epoch.
+func (s *StateTransistor) ProcessRewardsAndPenalties() error {
+	// Get deltas for epoch transition.
+	deltas, err := s.state.BalanceDeltas()
+	if err != nil {
+		return err
+	}
+	// Apply deltas
+	for index, delta := range deltas {
+		if delta > 0 {
+			// Increment
+			if err := s.state.IncreaseBalance(index, uint64(delta)); err != nil {
+				return err
+			}
+			continue
+		}
+		// Decrease balance
+		if err := s.state.DecreaseBalance(index, uint64(-delta)); err != nil {
+			return err
+		}
+	}
+	return nil
+}
diff --git a/cmd/erigon-cl/core/transition/process_rewards_and_penalties_test.go b/cmd/erigon-cl/core/transition/process_rewards_and_penalties_test.go
new file mode 100644
index 00000000000..178d8e082b3
--- /dev/null
+++ b/cmd/erigon-cl/core/transition/process_rewards_and_penalties_test.go
@@ -0,0 +1,37 @@
+package transition_test
+
+import (
+	_ "embed"
+	"testing"
+
+	"github.com/ledgerwatch/erigon/cl/clparams"
+	"github.com/ledgerwatch/erigon/cl/utils"
+	"github.com/ledgerwatch/erigon/cmd/erigon-cl/core/state"
+	"github.com/ledgerwatch/erigon/cmd/erigon-cl/core/transition"
+	"github.com/stretchr/testify/require"
+)
+
+//go:embed test_data/rewards_finality_test_expected.ssz_snappy
+var expectedState []byte
+
+//go:embed test_data/rewards_finality_test_state.ssz_snappy
+var startingState []byte
+
+func TestProcessRewardsAndPenalties(t *testing.T) {
+	// Load test states.
+	testState := state.New(&clparams.MainnetBeaconConfig)
+	require.NoError(t, utils.DecodeSSZSnappyWithVersion(testState, startingState, int(clparams.BellatrixVersion)))
+	expected := state.New(&clparams.MainnetBeaconConfig)
+	require.NoError(t, utils.DecodeSSZSnappyWithVersion(expected, expectedState, int(clparams.BellatrixVersion)))
+	// Make up state transistor
+	s := transition.New(testState, &clparams.MainnetBeaconConfig, nil, false)
+	// Do processing
+	require.NoError(t, s.ProcessRewardsAndPenalties())
+	// Now compare if the two states are the same by taking their root and comparing.
+	haveRoot, err := testState.HashSSZ()
+	require.NoError(t, err)
+	expectedRoot, err := testState.HashSSZ()
+	require.NoError(t, err)
+	// Lastly compare
+	require.Equal(t, expectedRoot, haveRoot)
+}
diff --git a/cmd/erigon-cl/core/transition/process_slashings.go b/cmd/erigon-cl/core/transition/process_slashings.go
index 3cf8d9a7841..22bea4cd8b3 100644
--- a/cmd/erigon-cl/core/transition/process_slashings.go
+++ b/cmd/erigon-cl/core/transition/process_slashings.go
@@ -6,10 +6,7 @@ func (s *StateTransistor) processSlashings(slashingMultiplier uint64) error {
 	// Get the current epoch
 	epoch := s.state.Epoch()
 	// Get the total active balance
-	totalBalance, err := s.state.GetTotalActiveBalance()
-	if err != nil {
-		return err
-	}
+	totalBalance := s.state.GetTotalActiveBalance()
 	// Calculate the total slashing amount
 	// by summing all slashings and multiplying by the provided multiplier
 	slashing := s.state.GetTotalSlashingAmount() * slashingMultiplier
diff --git a/cmd/erigon-cl/core/transition/process_sync_aggregate.go b/cmd/erigon-cl/core/transition/process_sync_aggregate.go
index 7abd1107226..009719f89c0 100644
--- a/cmd/erigon-cl/core/transition/process_sync_aggregate.go
+++ b/cmd/erigon-cl/core/transition/process_sync_aggregate.go
@@ -45,7 +45,7 @@ func (s *StateTransistor) processSyncAggregate(sync *cltypes.SyncAggregate) ([][
 		currByte := sync.SyncCommiteeBits[i/8]
 		if (currByte & (1 << bit)) > 0 {
 			votedKeys = append(votedKeys, committeeKeys[i][:])
-			if err := s.state.IncreaseBalance(int(vIdx), participantReward); err != nil {
+			if err := s.state.IncreaseBalance(vIdx, participantReward); err != nil {
 				return nil, err
 			}
 			earnedProposerReward += proposerReward
@@ -55,7 +55,7 @@ func (s *StateTransistor) processSyncAggregate(sync *cltypes.SyncAggregate) ([][
 			}
 		}
 	}
-	return votedKeys, s.state.IncreaseBalance(int(proposerIndex), earnedProposerReward)
+	return votedKeys, s.state.IncreaseBalance(proposerIndex, earnedProposerReward)
 }
 
 func (s *StateTransistor) ProcessSyncAggregate(sync *cltypes.SyncAggregate) error {
diff --git a/cmd/erigon-cl/core/transition/test_data/rewards_finality_test_expected.ssz_snappy b/cmd/erigon-cl/core/transition/test_data/rewards_finality_test_expected.ssz_snappy
new file mode 100644
index 00000000000..0adffd2e5d2
Binary files /dev/null and b/cmd/erigon-cl/core/transition/test_data/rewards_finality_test_expected.ssz_snappy differ
diff --git a/cmd/erigon-cl/core/transition/test_data/rewards_finality_test_state.ssz_snappy b/cmd/erigon-cl/core/transition/test_data/rewards_finality_test_state.ssz_snappy
new file mode 100644
index 00000000000..ab3bf299a9a
Binary files /dev/null and b/cmd/erigon-cl/core/transition/test_data/rewards_finality_test_state.ssz_snappy differ