Sahgal was born as Lakshmi Swaminathan in Madras (now known as Chennai) on 24 October 1914 to S. Swaminathan, a lawyer who practiced criminal law at Madras High Court and A.V. Ammukutty, better known as Ammu Swaminathan, a social worker and independence activist from the prominent Vadakkath family of Anakkara in Palghat, Kerala.
In 1939 Sahgal received her diploma in gynaecology and obstetrics.
During her stay at Singapore, she met the members of Netaji’s Indian National Army. Sahgal established a clinic for the poor, most of whom were migrant laborers 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 who were interested in forming an Indian liberation 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.
After Netaji (Subhas Chandra Bose) spoke of his determination to raise a women's regiment which would "fight for Indian Independence and make it complete", Lakshmi 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 organized relief camps and medical aid in Calcutta for refugees who streamed into India from Bangladesh. She was one of the founding members of AIDWA 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.
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 was also a leader of the All India Democratic Women's Association.