Collecting pixel-level labels for medical datasets can be a laborious and expensive process, and enhancing segmentation performance with a scarcity of labeled data is a crucial challenge. This work introduces AugPaint, a data augmentation framework that utilizes inpainting to generate image-label pairs from limited labeled data. AugPaint leverages latent diffusion models, known for their ability to generate high-quality in-domain images with low overhead, and adapts the sampling process for the inpainting task without need for retraining. Specifically, given a pair of image and label mask, we crop the area labeled with the foreground and condition on it during reversed denoising process for every noise level. Masked background area would gradually be filled in, and all generated images are paired with the label mask. This approach ensures the accuracy of match between synthetic images and label masks, setting it apart from existing dataset generation methods. The generated images serve as valuable supervision for training downstream segmentation models, effectively addressing the challenge of limited annotations. We conducted extensive evaluations of our data augmentation method on four public medical image segmentation datasets, including CT, MRI, and skin imaging. Results across all datasets demonstrate that AugPaint outperforms state-of-the-art label-efficient methodologies, significantly improving segmentation performance.