Take a backup of your htdocs and data folder (subfolder of MySQL folder), reinstall upgraded version and replace those folders.

Note:In case you have changed config files like PHP (php.ini), Apache (httpd.conf) or any other, please take back up of those files as well and replace them with newly installed version.

You can go through the following link as it helped me, should work for you as well. http://hype-free.blogspot.com/2007/07/updating-php-in-xampp-for-windows.html

Realizing that my answer helped couple of users, here is the edit from original link:

Edit:

First of all Always backup your data.

1. Download the latest binary version of PHP (make sure to get the .zip package not the installer)
2. De-archive it to a directory
3. Overwrite the contents of directory in the php subfolder of your XAMPP installation directory.
4. Overwrite the contents of the directory apache\bin with the newer versions.
5. Now the trick: take the files which have a '_2' in their names (for example php5apache2_2.dll or php5apache2_2_filter.dll), copy them in the apache\bin subdirectory and remove the '_2' part, overwriting the existing files. This is necessary because by XAMPP uses Apache version 2.2 and the files with the 2 prefix are built for Apache 2.0, so you must take the files build for the newer version (which has a different plugin interface) and rename them in the filenames XAMPP expects.

NOTE: there are two directories to be updated with new version of files, namely php sub-directory and apache/bin sub-directory, inside XAMPP installation.

Simplest method to upgrade PHP in XAMPP:

1. Download latest portable version of XAMPP.
2. Extract the archive(not where XAMPP already installed).
3. Copy the PHP folder from the extracted archive.
4. Keep back up of PHP folder which is in installed XAMPP directory. You can backup it like changing the PHP folder name to PHP-old orlike PHP-version-number
5. Paste the PHP folder which you copied from the extracted archive.
6. Replace the php.ini file with your backup folder php.ini file in case you have changed the default settings earlier.
7. That's all, start/restart the server.