A special court in eastern city of Ranchi found him guilty of embezzling around nine million Indian Rupees (around 140,000 US dollars) during his chief ministerial term in eastern state of Bihar in early 1990s.
The court also slapped two fines of Rs 5 lakh each on the former Bihar Chief Minister.
Soon after the announcement of quantum of punishment, RJD leaders said that they would appeal against the sentence in a higher court.
Meanwhile, Lalu's son and RJD leader Tejashwi Yadav said that the trial court's decision will be challenged in the high court.
"An open jail is best for these people (convicts), as they also have experience of cow farming", the judge was quoted as saying by the ANI.
On Friday, citing illness and old age, Lalu had sought leniency from the court.
As the CBI judge was delivering the sentence, Lalu Prasad, who is at present lodged in the Central Jail here, was standing with folded hands.
On the other hand, BJP and its ally JD (U) said that no one is above the law, after the RJD said its leader has fallen prey to a "conspiracy" by Bihar Chief Minister Nitish Kumar and the saffron party.
Lalu Prasad was the Chief Minister of the undivided state from 1990 to 1997. The case pertained to fraudulent withdrawal of ₹84.5 lakh from the Deoghar district (now in Jharkhand) treasury during the period 1991-94.
"The more we are harassed, the stronger will be the public support in our favour". The Special CBI Court was supposed to sentence the convicts on January 3.