Accrued market discount has two parts, and one of those is the interest income that you're seeing.
The amount of the discount is correctly reported as interest income. It is not a capital gain. You don't remove or adjust that on Schedule B. TurboTax is handling that part correctly.
However, the amount of the accrued market discount recognized as interest income is then used to adjust the capital gain when a bond is sold. It increases the basis of the bond, lowering the capital gain that is generated from the sale (or increasing the loss.) This is the part that goes on Form 8949.
There isn't a standard format for reporting that used by all firms, so you need to check to see if it is already built into the reported cost basis of your asset. Some brokers add the market discount back in for you and others don't.
If yours doesn't, then you adjust the cost basis of your bond in the Investments section of TurboTax. Usually if you examine the printed or PDF version of your 1099 you will be able to determine if your cost basis includes this interest income added in or not.
If you're not sure, you can ask the broker.
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