The decision by the special court in the neighboring state of Jharkhand, once part of Bihar, makes Yadav one of the country's first politicians to face political disqualification under a new Supreme Court order banning convicts from public office.
Yadav, 65, has denied the allegations and his family members have said he will appeal the verdict.
"This is all politics. We will seek justice from the high court," Yadav's wife, Rabri Devi, said Thursday.
The charismatic Yadav is credited with changing the shape of Indian politics, previously dominated by the elite classes, by galvanizing low-caste Hindus into a powerful voting bloc.
He served as Bihar's highest elected official from 1990 to 1997, when he was forced to resign amid allegations that he was pocketing funds meant for farmers in the desperately poor state. He spent five months in jail that year, while his wife took over as chief minister.
Yadav later served as the federal railway minister in 2004-09. He and his wife were acquitted in a separate case that accused them of accumulating wealth and property beyond their legal incomes.
Yadav founded the Rashtriya Janata Dal party in Bihar and has been a staunch ally of Prime Minister Manmohan Singh's coalition government.
Yadav's conviction came a day after the government withdrew a controversial executive order exempting legislators from the Supreme Court ban on convicts holding political office.
