John Warne, who lived in Longniddry in East Lothian, stole the money in connection with a VAT repayment fraud and spent it on cars and holidays.
The crime emerged as police investigated VAT-related fraud in the repairs system. A separate inquiry into Edinburgh's former statutory notice system, run by the Property Conservation and Property Care departments, has been ongoing.
Up until 1998, the council mistakenly charged VAT on repair bills for homeowners. A team was set up inside the local authority, of which Warne was a member, to recoup the cash from HMRC and give it back to homeowners.
However, 55-year-old Warne diverted £122,925.39 for his own benefit. He did so between July 2008 and May 2010, spending the money on classic cars, home improvements, mortgage payments on buy-to-let properties, and lengthy holidays for relatives.
His crime only came to light after he had taken early retirement from the council.
He has since made a full repayment, which included the sale of his family home.
After pleading guilty in November, on Friday the former team leader in the council finance section was jailed for one year.
Sheriff Frank Crowe said of the sentence: "I am taking into account your previous good record, that full repayment has been made and that your plea of guilty was tendered at a very early stage.
"Nevertheless, I am left with a situation where you, as a public servant, embezzled funds from the council for your own benefit and to make gifts to friends and family.
"I was urged to consider making a maximum 300-hour community payback order.
"However, a breach of trust of this magnitude can, in my view, only be met by a prison sentence."
The council declined to comment.