Sasikala was an aide of chief minister Jayalalitha, who died in December.
Though she has never held public office, the ruling AIADMK party said last week that she would be the next chief minister of the southern state.
But the state was plunged into uncertainty after the acting chief minister - O Panneerselvam revolted against her.
Indian law bars convicts in corruption cases from contesting an election for a period of six years after completing a jail sentence.
Tuesday's ruling against Sasikala brought a four-year jail sentence, meaning she will not be able to run for office for 10 years.
The verdict is a big blow to Sasikala who was claiming the support of a majority of Tamil Nadu's law makers to become chief minister.
Panneerselvam, who alleges he was forced to resign to make way for Sasikala, is likely to now stake a claim for the post.