Yes, you must pay them the interest. It is not your income if you are giving it back.
Are security deposits taxable?Security deposits are not included in income when you receive them if you plan to return them to your tenants at the end of the lease. In contrast, deposits for the last month's rent are taxable when you receive them, because they are really rents paid in advance.
What if I pocket some of the security deposit?If you eventually keep part or all of the security deposit because the tenant does not live up to the terms of the lease, you must include that amount as income on your tax return for the year in which the lease terminates. Of course, if you withhold the security deposit to cover damages caused by the tenant, the cost of repairing such damage will be deductible, and offset the income from the forfeited security deposit.
https://turbotax.intuit.com/tax-tips/rental-property/real-estate-tax-and-rental-property/L3e09vT71
