@PraNiMa , Namaste ji
Assuming that you are US person ( citizen/GreenCard/Resident for Tax purposes ), and
(a) have FD/CD in a financial institution in India ( Foreign Bank ) earning
(b) under the "saving clause " of US-India Tax treaty US can/will tax a US person as if the tax treaty is not in force for the tax year under consideration
(c) under the US-Tax Treaty double taxation mitigation clause is in effect for Taxes paid on the same income to India.
Considering your options of whether to recognize the interest earnings ( on a 3-year FD/CD) year by year or at distribution--> ( I have marked in BOLD the applicable words
(a) In general. As a general rule, interest received by or credited to the taxpayer constitutes gross income and is fully taxable. Interest income includes interest on savings or other bank deposits; interest on coupon bonds; interest on an open account, a promissory note, a mortgage, or a corporate bond or debenture; the interest portion of a condemnation award; usurious interest (unless by State law it is automatically converted to a payment on the principal); interest on legacies; interest on life insurance proceeds held under an agreement to pay interest thereon; and interest on refunds of Federal taxes. For rules determining the taxable year in which interest, including interest accrued or constructively received, is included in gross income, see section 451 and the regulations thereunder. For the inclusion of interest in income for the purpose of the retirement income credit, see section 37 and the regulations thereunder. For credit of tax withheld at source on interest on tax-free covenant bonds, see section 32 and the regulations thereunder. For rules relating to interest on certain deferred payments, see section 483 and the regulations thereunder. "
Based on above "Received or Credited" , you have to recognize the FD earnings in the year it is actuated. Thus in the example you provided , you were credited ( not actually received ) an interest amount for each of the years -- 2022, 2023 and 2024 ( assuming that the financial institution credited the yearly interest at the end of each 12 months from the date of opening the account ). So for US purposes , you need to recognize these amounts each year on your US return.
I recognize that this creates a possible issue , if on your ITR ( Indian Tax return ) you did not )/ were not required to ) recognize the credited interest and so were not taxed. This is in addition to the income & tax allocation issues caused by the different tax year ( between US and India ).
Thus in general your "option 1" is what you need to achieve whether you do it through amending your past returns or otherwise.
Does this make sense or am I muddying the water more ? Note that depending on the quantum of the "earned/credited interest " and FT thereon, you may be able to use the safe harbor FTC rather than use of form 1116 ( with its limitations ).
Is there more I can do for you ?
Namaste ji
pk
