It is Waajib (compulsory) for a Muslim to reply to the salaam of a Muslim if there is no fear of Fitna and evil, for example, a Ghayr Mahram makes salaam to a male.
In such a situation where there is fear of Fitnah and evil, one should not reply to the salaam. It is not appropriate for a Muslim to display bad character and conduct in front of a non-Muslim. If a non-Muslim makes salaam, in principle, one should reply ?Salaamun alaa manittaba? alhudaa? (May peace be upon those that follow guidance). One may offer an answer to the effect of the above with respect and dignity.
and Allah Ta’ala Knows Best
Mufti Ebrahim Desai