It is vulgar. It's okay to use with friends, but it can have both a positive and negative tone. Negative tone: Your friend has a bag of sweets, and you ask your friend if you can eat some. You eat more than half of the bag, more than your friend expected you to take. Your friend says 'you're taking the piss'. From this you should know that your friend is unhappy, because you ate so many of his sweets. 'Taking the piss' in this context can mean 'taking advantage'. ----- Positive tone: Your friend spills water on his trousers, around the crotch area. You laugh at him and shout 'haha he wet himself'. Your friend may ask you 'you taking the piss?!', or you can say to him 'no not really, I'm only taking the piss'. In this context, 'taking the piss' means 'only joking with you'. (Like what Equis.Lung said) --- Another negative tone: If you and your friends are joking around, someone may say or do something which is perhaps a little too offensive than intended. Someone can say 'you are taking the piss now'. You should know from this that you have done something which is offensive, you have overdone the joke and now it is no longer a joke but an insult. In this context, 'taking the piss' = 'overstepping the line', 'going overboard', 'taking a joke too far'. --- Really, this is mostly used with a negative tone. You would be really good friends to use this with a positive tone.

I DON'T THINK IT'S BAD BUT A LITTLE ORAL AND IMPLITE, WE USUALLY USE IT LIKE take the piss out of sb. JUST MEANS make fun of sb.OR tease sb. MAYBE YOU CAN SAY don't take what she said seriously she was only taking the piss out of you.

The word 'piss' makes it inappropriate to use formally ,howeveramong younger people ,peers and friends it is much more acceptable.It is even employed by headline writers in broadsheet gazettes and tabloids.It means to mock,ridicule, tease someone or something. The term sometimes refers to a form of mockery in which the mocker exaggerates the other person's characteristics; pretending to take on his or her attitudes, etc., in order to make them look funny. Or it may be used to refer to a ruse where a person is led to believe something is true that is not (usually a fairly unbelievable story) for the purpose of ridicule of the subject.

The best advice I could give to you is to not use it, or else you'll use it wrongly or cause offense.

Don't use this phrase in polite, formal situations as it is offensive and vulgar. But I think that you knew that already, didn't you?