Incarcerate prisoner with penalty (7)
I believe the answer is:
confine
'incarcerate' is the definition.
(I know that incarcerate is a more specific form of confine)
'prisoner with penalty' is the wordplay.
'prisoner' becomes 'con' (abbreviation for 'convict').
'with' is a charade indicator (letters next to each other).
'penalty' becomes 'fine' (a financial penalty).
'con'+'fine'='CONFINE'
(Other definitions for confine that I've seen before include "Limit" , "Imprison" , "Keep within limits" , "Restrict (to an area)" , "Shut in" .)