From ThresholdRPG Wiki
In character (IC) refers to everything in the game world. Everything your character sees, does, experiences is in character.
In character also refers to having your character behave in a manner realistic to the game world. For example, discussing the latest and most daring episode of Kids in the Hall while in the Green Griffon Tavern is not acceptable in character behavior, and would in fact be considered out of character (OOC).