Is interest on a rental deposit haram?

Why the interest is a problem

When you pay a security deposit, the money is still yours; the landlord or a deposit scheme only holds it as security. In some places the law requires the deposit to earn interest for the tenant. In the US, states such as New York and Massachusetts, and some cities, require it. In the UK, deposits sit in protection schemes, and tenants rarely receive interest.

Interest paid simply because your money sat in an account over time is riba. The Quran tells those who give up riba what they are entitled to:

The Prophet ﷺ cursed the one who consumes riba, the one who pays it, the one who writes it down and the two witnesses (Sahih Muslim 1598). So the principle is simple: your deposit back, nothing extra. For a fuller explanation, see What is riba in Islam?

What to do with the interest

• Accept it if the law gives it to you. Many scholars say it's better to take it than leave it with a bank, then pass it on.
• Give it to charity or a public-benefit cause, without expecting reward, since it was never yours to earn.
• Don't use it for your own rent, bills or groceries.

The same approach applies to interest from a bank account. See What do I do with interest money from my bank account?

What about deductions and fees?

A landlord may deduct real costs from your deposit, such as unpaid rent, cleaning or damage beyond normal wear. That isn't riba; it's fair compensation agreed in the lease. Fees charged as a percentage of late rent are a different matter that scholars debate.

If you're the landlord

Holding a tenant's deposit as security is allowed. Most scholars say you shouldn't use it for your own benefit, and if the law requires you to pay interest to the tenant, many scholars treat it as a legal obligation outside your control rather than a loan you chose. Where the rules allow, use a protection scheme or an Islamic account to hold deposits, and ask a local scholar about your exact case. See also Is a high-yield savings account haram?