Prosecutors had demanded a six-year jail term for Chung Mong-koo, chairman of the world's number six car-marker, for embezzling company funds and other charges.
The presiding judge said the lesser sentence was justified because of Chung's "big contributions to the development of the country's economy" and his involvement in charity.
Hyundai's lawyers have said they plan to appeal against the sentence.
Chung had apologised for his actions and his lawyers had argued he be given a suspended sentence - meaning he would not actually serve prison time unless involved in other crimes.
Last year he admitted to having a role in setting up slush funds through affiliates of Hyundai.
'Criminal acts'
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| Hyundai is South Korea's biggest automaker and a major exporter [Reuters] |
"The court decided a strict execution of law is necessary to eradicate illegal and anti-market practices in the past and help South Korea build a more advanced economy," he said.
Three other Hyundai officials facing similar charges were also convicted but all given suspended sentences.
The ruling is being seen as another blow for a company contending with a rising won and continuing unrest from labour unions.
Analysts had expected the court to hand down a suspended jail term to leave Chung at the helm of Hyundai, given the group's importance to the South Korean economy.
Exports
According to company data exports by Hyundai and its affiliate Kia Motors account for nearly 7 per cent of total exports from South Korea, Asia's third-largest economy.
Chung is the son of Hyundai group founder, whose post-World War II auto-repair shop burgeoned into a sprawling conglomerate.
He was arrested last April on allegations that Hyundai and its affiliates set up slush funds to pay for political favours.
Chung will remain free on bail for the time being and does not face immediate arrest.
He was absent from work for more than two months after being jailed following his April arrest and entering a hospital for a health exam. He was granted bail in June and returned to work in July.
