Create the user and their home

cd /home
mkdir username
useradd -d /home/username -M -N -g users username
sudo chown root:root /home/username
sudo chmod 755 /home/username

Edit /etc/ssh/sshd_config

nano /etc/ssh/sshd_config

Search for “lib/openssh/sftp-server” and make it like

#Subsystem sftp /usr/lib/openssh/sftp-server
Subsystem sftp internal-sftp

Add the following lines bellow it…

Match User username
    ChrootDirectory /home/username
    ForceCommand internal-sftp

Restart SSH

service ssh restart

More readings
http://www.techrepublic.com/blog/linux-and-open-source/chroot-users-with-openssh-an-easier-way-to-confine-users-to-their-home-directories/
http://superuser.com/questions/370953/how-to-not-allow-user-outside-of-home-directory-with-sftp