The agreement Tuesday was $162,500 below midpoint of the $11.8 million he had asked for and the $8.05 million Cleveland had offered when players and teams swapped proposed arbitration salaries last month.
Masterson's request was the highest among players who exchanged figures. A hearing had been scheduled for Thursday.
Masterson, a 28-year-old right-hander, led the Indians in wins last year when he went 14-10 with a 3.45 ERA. He can earn additional award bonuses as part of the deal.
Masterson will be eligible for free agency after this season.