Where should interest earned from the bank be used for?

In principal, it is not permissible for one to deposit money into an interest-bearing account. One should immediately transfer the money into a non-interest-bearing account if such an account is available. However, it is permissible to deposit one’s money into an interest-bearing account if there is no other alternative. 

In principal, one should return the interest money accrued from one’s bank account to its owner. However, if that is not possible, then the interest money accrued from the bank should be expended on the poor and needy (who are the valid recipients of Zakaat whether they are Muslim or non-Muslim) without the intention of receiving any reward since such money is tainted. 

 

Interest money can also be given to one’s poor relatives who are entitled to receive Zakaat, Islamic institutions and other charitable organizations. 

Interest money cannot be used for one’s personal expenses.

Reference Links - https://ampindia.org/cms/public/cmsPageAttachments/1539009572$$Interest%20Income_Fatwas.pdf