What good it has if the WordPress’ permalink setting doesn’t work when you running it using XAMPP? I use XAMPP to design my website so I don’t have to upload the design several times to test the new design. Meeting this problem really frustrates me but I have solved the problem by one post on the WordPress support forum.

This is what I do

1. Find the file “httpd.conf” in “C:\xampp\apache\conf\” or else depends on where you installed the XAMPP.
2. Find the line “#LoadModule rewrite_module modules/mod_rewrite.so” and erase the number sign. Latter it will look like “#LoadModule rewrite_module modules/mod_rewrite.so”
3. Find every “AllowOverride None” text and replace it with “AllowOverride All”
4. Restart the XAMPP and the permalink setting should be working now.

Thanks to LenK for the help, Source: http://wordpress.org/support/topic/201359