Sahgal was born as Lakshmi Swaminathan in Malabar under Madras Presidency on 24 October 1914 to S. Swaminathan, a lawyer who practised criminal law at Madras High Court, and A.V. Ammukutty, better known as Ammu Swaminathan, a social worker and independence activist from an aristocratic Nair family known as "Vadakkath" family of Anakkara in Palghat, Kerala.
Sahgal chose to study medicine and received an MBBS degree from Madras Medical College in 1938. A year later, she received her diploma in gynaecology and obstetrics. She worked as a doctor in the Government Kasturba Gandhi Hospital located at Triplicane Chennai.
In 1940, she left for Singapore after the failure of her marriage with pilot P.K.N. Rao. During her stay at Singapore, she met some members of Subhas Chandra Bose's Indian National Army. She established a clinic for the poor, most of whom were migrant labourers from India. It was at this time that she began to play an active role in the India Independence League.
In 1942, during the surrender of Singapore by the British to the Japanese, Sahgal aided wounded prisoners of war, many of whom were interested in forming an Indian independence army. Singapore at this time had several nationalist Indians working there including K. P. Kesava Menon, S. C. Guha and N. Raghavan, who formed a Council of Action. Their Indian National Army, or Azad Hind Fauj, however, received no firm commitments or approval from the occupying Japanese forces regarding their participation in the war.
It was against this backdrop that Subhas Chandra Bose arrived in Singapore on 2 July 1943. In the next few days, at all his public meetings, Bose spoke of his determination to raise a women's regiment which would "fight for Indian Independence and make it complete". Lakshmi had heard that Bose was keen to draft women into the organisation and requested a meeting with him from which she emerged with a mandate to set up a women’s regiment, to be called the Rani of Jhansi regiment. Women responded enthusiastically to join the all-women brigade and Dr. Lakshmi Swaminathan became Captain Lakshmi, a name and identity that would stay with her for life.
The INA marched to Burma with the Japanese army in December 1944, but by March 1945, with the tide of war turning against them, the INA leadership decided to beat a retreat before they could enter Imphal. Captain Lakshmi was arrested by the British army in May 1945, remaining in Burma until March 1946, when she was sent to India – at a time when the INA trials in Delhi heightened popular discontent with and hastened the end of colonial rule.
In 1971, Sahgal joined the Communist Party of India (Marxist) and represented the party in the Rajya Sabha. During the Bangladesh crisis, she organised relief camps and medical aid in Calcutta for refugees who streamed into India from Bangladesh. She was one of the founding members of All India Democratic Women's Association in 1981 and led many of its activities and campaigns. She led a medical team to Bhopal after the gas tragedy in December 1984, worked towards restoring peace in Kanpur following the anti-Sikh riots of 1984 and was arrested for her participation in a campaign against the Miss World competition in Bangalore in 1996. She was still seeing patients regularly at her clinic in Kanpur in 2006, at the age of 92.
In 2002, four leftist parties – the Communist Party of India, the Communist Party of India (Marxist), the Revolutionary Socialist Party, and the All India Forward Bloc – nominated Sahgal as a candidate in the presidential elections. She was the sole opponent of A.P.J. Abdul Kalam, who emerged victorious.
Sahgal married Prem Kumar Sahgal in March 1947 in Lahore. After their marriage, they settled in Kanpur, where she continued with her medical practice and aided the refugees who were arriving in large numbers following the Partition of India. They had two daughters: Subhashini Ali and Anisa Puri.
Subhashini is a prominent Communist politician and labour activist. According to Ali, Sahgal was an atheist. The filmmaker Shaad Ali is her grandson.
On 19 July 2012, Sehgal suffered a cardiac arrest and died on 23 July 2012 at 11:20 A.M. at the age of 97 at Kanpur. Her body was donated to Kanpur Medical college for medical research. Captain Lakshmi Sehgal International Airport is proposed at Kanpur Dehat district.
In 1998, Sahgal was awarded the Padma Vibhushan by Indian president K. R. Narayanan.