The former Indian Railway minister has also been fined Rs 25 lakh.
The RJD party said it would appeal the verdict and punishment in a higher court.
The 66-year-old was sent to prison in Ranchi on Monday after being convicted of embezzling crores of rupees in the scam.
He was found guilty along with Congress leader Jagannath Mishra, who has also served as chief minister of Bihar, and two leaders of the ruling Janata Dal-United (JD-U) in the case that has stretched over 17 years.
Jagannath Mishra has been sentenced to four years in jail.
With this conviction, Lalu Prasad will now lose his Lok Sabha membership due to a recent Supreme Court judgement that ruled a legislator convicted in a case where the minimum sentence is two years in jail will lose their seat immediately.
The case against Lalu Prasad is based on the misuse of Rs 37 crores of public money as part of a larger scam that saw Rs 950 crores being used to pay fictitious bills for medicines and fodder for cattle in Bihar.
The CBI had alleged that as chief minister, Lalu accepted kickbacks, was aware of the financial malevolence of officials who he "constantly shielded and patronised."
On Sept 17, the court had reserved its verdict in the case while the Supreme Court on Aug 13 dismissed the plea of Lalu Prasad to transfer his trial in the case to another judge.
While Lalu Prasad did not speak to the media after the verdict was delivered in a packed courtroom, his son Tejaswi vowed to fight the ruling in a higher court and in "the court of the people".
Lalu's wife Rabri Devi earlier said she and her son will run the party in the absence of Lalu like "Sonia Gandhi and Rahul Gandhi run Congress."
--IBNS (Posted on 03-10-2013)