In addition to Putin not wanting to turn him into a martyr, keeping him around as an opposition candidate allows Putin to maintain a facade of democratic legitimacy. The people have another viable option besides Putin, even if it's just the illusion of free choice.

Why martyr him when you can slowly turn him into Emmanuel Goldstein?

He’s afraid he’ll be martyred. Don’t forget, Navalny returned to Russia willingly right after releasing a documentary on Putins secret mansion. It was allegedly to put Putin in the awkward position of choosing between keeping an opponent with popular support alive, and killing him and potentially motivating the masses. Locking him away somewhere distant and keeping him there until he’s forgotten about is probably the best way to get rid of him. I’m pretty sure most Russians know that the legal system is a farce.