Hadhrat Sufiyan Sauri (RA) says that those people who are giving charity from haram money are actually washing their cloth with urine so it becomes more napak. So is it justified to give charity from interest?
Since interest money is haram and malice, it is not right do sadaqah of haram and impure money with the intention of reward. Scholars of Fiqh have ruled kufr of a person who gives haram money to a poor with the intention of reward as he believes a haram thing as halal:
وفي شرح الوهبانيه عن البزازية: انما يكفر إذا تصدق بالحرام القطعى ، وفي الشامية: أى مع رجاء الثواب الناشیء عن استحلاله كما مر فافهم (شامى زكريا 3/219)
Hence if the interest money is received from bank then it should be given in charity to the poor only to save oneself from the curse of haram money without the intention of reward. And if it is gained from a person in any interest based dealing then it should be returned to the owner. But if it is not possible to return it to the owner then it too should be given in charity to the poor and needy ones without the intention of reward. In short, the interest money should not be given in charity with the intention of reward.
Allah (Subhana Wa Ta’ala) knows Best
Darul Uloom Deoband