diff --git a/crates/ty_python_semantic/resources/mdtest/assignment/annotations.md b/crates/ty_python_semantic/resources/mdtest/assignment/annotations.md
index 38655727266dbd..6fcd7e11e79bc9 100644
--- a/crates/ty_python_semantic/resources/mdtest/assignment/annotations.md
+++ b/crates/ty_python_semantic/resources/mdtest/assignment/annotations.md
@@ -262,6 +262,8 @@ f: dict[list[Literal[1]], list[Literal[Color.RED]]] = {[1]: [Color.RED, Color.RE
 reveal_type(f)  # revealed: dict[list[Literal[1]], list[Color]]
 
 class X[T]:
+    value: T
+
     def __init__(self, value: T): ...
 
 g: X[Literal[1]] = X(1)
@@ -366,7 +368,7 @@ class Z[T]:
 
 z1: Z[Any] = Z(1)
 # TODO: This should reveal `Z[Any]`.
-reveal_type(z1)  # revealed: Z[int]
+reveal_type(z1)  # revealed: Z[Literal[1]]
 ```
 
 ## PEP-604 annotations are supported
@@ -485,7 +487,7 @@ def f[T](x: T) -> list[T]:
     return [x]
 
 a = f("a")
-reveal_type(a)  # revealed: list[Literal["a"]]
+reveal_type(a)  # revealed: list[str]
 
 b: list[int | Literal["a"]] = f("a")
 reveal_type(b)  # revealed: list[int | Literal["a"]]
@@ -499,10 +501,10 @@ reveal_type(d)  # revealed: list[int | tuple[int, int]]
 e: list[int] = f(True)
 reveal_type(e)  # revealed: list[int]
 
-# error: [invalid-assignment] "Object of type `list[Literal["a"]]` is not assignable to `list[int]`"
+# error: [invalid-assignment] "Object of type `list[str]` is not assignable to `list[int]`"
 g: list[int] = f("a")
 
-# error: [invalid-assignment] "Object of type `list[Literal["a"]]` is not assignable to `tuple[int]`"
+# error: [invalid-assignment] "Object of type `list[str]` is not assignable to `tuple[int]`"
 h: tuple[int] = f("a")
 
 def f2[T: int](x: T) -> T:
@@ -607,7 +609,7 @@ def f3[T](x: T) -> list[T] | dict[T, T]:
     return [x]
 
 a = f(1)
-reveal_type(a)  # revealed: list[Literal[1]]
+reveal_type(a)  # revealed: list[int]
 
 b: list[Any] = f(1)
 reveal_type(b)  # revealed: list[Any]
@@ -667,7 +669,7 @@ x4 = invariant(1)
 reveal_type(x1)  # revealed: Bivariant[Literal[1]]
 reveal_type(x2)  # revealed: Covariant[Literal[1]]
 reveal_type(x3)  # revealed: Contravariant[Literal[1]]
-reveal_type(x4)  # revealed: Invariant[Literal[1]]
+reveal_type(x4)  # revealed: Invariant[int]
 
 x5: Bivariant[Any] = bivariant(1)
 x6: Covariant[Any] = covariant(1)
diff --git a/crates/ty_python_semantic/resources/mdtest/bidirectional.md b/crates/ty_python_semantic/resources/mdtest/bidirectional.md
index 1211f92fe577a8..ac4062950cd0ad 100644
--- a/crates/ty_python_semantic/resources/mdtest/bidirectional.md
+++ b/crates/ty_python_semantic/resources/mdtest/bidirectional.md
@@ -16,28 +16,19 @@ python-version = "3.12"
 ```
 
 ```py
+from typing import Literal
+
 def list1[T](x: T) -> list[T]:
     return [x]
 
-l1 = list1(1)
+l1: list[Literal[1]] = list1(1)
 reveal_type(l1)  # revealed: list[Literal[1]]
-l2: list[int] = list1(1)
-reveal_type(l2)  # revealed: list[int]
 
-# `list[Literal[1]]` and `list[int]` are incompatible, since `list[T]` is invariant in `T`.
-# error: [invalid-assignment] "Object of type `list[Literal[1]]` is not assignable to `list[int]`"
-l2 = l1
-
-intermediate = list1(1)
-# TODO: the error will not occur if we can infer the type of `intermediate` to be `list[int]`
-# error: [invalid-assignment] "Object of type `list[Literal[1]]` is not assignable to `list[int]`"
-l3: list[int] = intermediate
-# TODO: it would be nice if this were `list[int]`
-reveal_type(intermediate)  # revealed: list[Literal[1]]
-reveal_type(l3)  # revealed: list[int]
+l2 = list1(1)
+reveal_type(l2)  # revealed: list[int]
 
-l4: list[int | str] | None = list1(1)
-reveal_type(l4)  # revealed: list[int | str]
+l3: list[int | str] | None = list1(1)
+reveal_type(l3)  # revealed: list[int | str]
 
 def _(l: list[int] | None = None):
     l1 = l or list()
@@ -233,6 +224,9 @@ def _(flag: bool):
 
     def _(c: C):
         c.x = lst(1)
+
+        # TODO: Use the parameter type of `__set__` as type context to avoid this error.
+        # error: [invalid-assignment]
         C.x = lst(1)
 ```
 
diff --git a/crates/ty_python_semantic/resources/mdtest/dataclasses/dataclasses.md b/crates/ty_python_semantic/resources/mdtest/dataclasses/dataclasses.md
index 854808530241b1..ee3da5516f3f9c 100644
--- a/crates/ty_python_semantic/resources/mdtest/dataclasses/dataclasses.md
+++ b/crates/ty_python_semantic/resources/mdtest/dataclasses/dataclasses.md
@@ -866,10 +866,10 @@ reveal_type(ParentDataclass.__init__)
 reveal_type(ChildOfParentDataclass.__init__)
 
 result_int = uses_dataclass(42)
-reveal_type(result_int)  # revealed: ChildOfParentDataclass[Literal[42]]
+reveal_type(result_int)  # revealed: ChildOfParentDataclass[int]
 
 result_str = uses_dataclass("hello")
-reveal_type(result_str)  # revealed: ChildOfParentDataclass[Literal["hello"]]
+reveal_type(result_str)  # revealed: ChildOfParentDataclass[str]
 ```
 
 ## Descriptor-typed fields
diff --git a/crates/ty_python_semantic/resources/mdtest/generics/pep695/classes.md b/crates/ty_python_semantic/resources/mdtest/generics/pep695/classes.md
index 30a9ee88ae2e04..3b697678851a16 100644
--- a/crates/ty_python_semantic/resources/mdtest/generics/pep695/classes.md
+++ b/crates/ty_python_semantic/resources/mdtest/generics/pep695/classes.md
@@ -322,7 +322,7 @@ class C[T, U]:
 class D[V](C[V, int]):
     def __init__(self, x: V) -> None: ...
 
-reveal_type(D(1))  # revealed: D[int]
+reveal_type(D(1))  # revealed: D[Literal[1]]
 ```
 
 ### Generic class inherits `__init__` from generic base class
@@ -334,8 +334,8 @@ class C[T, U]:
 class D[T, U](C[T, U]):
     pass
 
-reveal_type(C(1, "str"))  # revealed: C[int, str]
-reveal_type(D(1, "str"))  # revealed: D[int, str]
+reveal_type(C(1, "str"))  # revealed: C[Literal[1], Literal["str"]]
+reveal_type(D(1, "str"))  # revealed: D[Literal[1], Literal["str"]]
 ```
 
 ### Generic class inherits `__init__` from `dict`
@@ -358,7 +358,7 @@ context. But from the user's point of view, this is another example of the above
 ```py
 class C[T, U](tuple[T, U]): ...
 
-reveal_type(C((1, 2)))  # revealed: C[int, int]
+reveal_type(C((1, 2)))  # revealed: C[Literal[1], Literal[2]]
 ```
 
 ### Upcasting a `tuple` to its `Sequence` supertype
diff --git a/crates/ty_python_semantic/resources/mdtest/type_compendium/tuple.md b/crates/ty_python_semantic/resources/mdtest/type_compendium/tuple.md
index 0142bfa4df0233..e323d25a17beab 100644
--- a/crates/ty_python_semantic/resources/mdtest/type_compendium/tuple.md
+++ b/crates/ty_python_semantic/resources/mdtest/type_compendium/tuple.md
@@ -514,10 +514,8 @@ For covariant types, such as `frozenset`, the ideal behaviour would be to not pr
 types to their instance supertypes: doing so causes more false positives than it fixes:
 
 ```py
-# TODO: better here would be `frozenset[Literal[1, 2, 3]]`
-reveal_type(frozenset((1, 2, 3)))  # revealed: frozenset[int]
-# TODO: better here would be `frozenset[tuple[Literal[1], Literal[2], Literal[3]]]`
-reveal_type(frozenset(((1, 2, 3),)))  # revealed: frozenset[tuple[int, int, int]]
+reveal_type(frozenset((1, 2, 3)))  # revealed: frozenset[Literal[1, 2, 3]]
+reveal_type(frozenset(((1, 2, 3),)))  # revealed: frozenset[tuple[Literal[1], Literal[2], Literal[3]]]
 ```
 
 Literals are always promoted for invariant containers such as `list`, however, even though this can
diff --git a/crates/ty_python_semantic/resources/mdtest/typed_dict.md b/crates/ty_python_semantic/resources/mdtest/typed_dict.md
index b4203ce2b662ff..1e89bda0319b57 100644
--- a/crates/ty_python_semantic/resources/mdtest/typed_dict.md
+++ b/crates/ty_python_semantic/resources/mdtest/typed_dict.md
@@ -126,21 +126,21 @@ Also, the value types ​​declared in a `TypedDict` affect generic call infere
 
 ```py
 class Plot(TypedDict):
-    y: list[int]
-    x: list[int] | None
+    y: list[int | None]
+    x: list[int | None] | None
 
 plot1: Plot = {"y": [1, 2, 3], "x": None}
 
 def homogeneous_list[T](*args: T) -> list[T]:
     return list(args)
 
-reveal_type(homogeneous_list(1, 2, 3))  # revealed: list[Literal[1, 2, 3]]
+reveal_type(homogeneous_list(1, 2, 3))  # revealed: list[int]
 plot2: Plot = {"y": homogeneous_list(1, 2, 3), "x": None}
-reveal_type(plot2["y"])  # revealed: list[int]
+reveal_type(plot2["y"])  # revealed: list[int | None]
 
 plot3: Plot = {"y": homogeneous_list(1, 2, 3), "x": homogeneous_list(1, 2, 3)}
-reveal_type(plot3["y"])  # revealed: list[int]
-reveal_type(plot3["x"])  # revealed: list[int] | None
+reveal_type(plot3["y"])  # revealed: list[int | None]
+reveal_type(plot3["x"])  # revealed: list[int | None] | None
 
 Y = "y"
 X = "x"
diff --git a/crates/ty_python_semantic/src/types/call/bind.rs b/crates/ty_python_semantic/src/types/call/bind.rs
index 423783b420c85c..78c374429ca715 100644
--- a/crates/ty_python_semantic/src/types/call/bind.rs
+++ b/crates/ty_python_semantic/src/types/call/bind.rs
@@ -30,7 +30,8 @@ use crate::types::function::{
     OverloadLiteral,
 };
 use crate::types::generics::{
-    InferableTypeVars, Specialization, SpecializationBuilder, SpecializationError,
+    GenericContextTypeVar, InferableTypeVars, Specialization, SpecializationBuilder,
+    SpecializationError,
 };
 use crate::types::signatures::{Parameter, ParameterForm, ParameterKind, Parameters};
 use crate::types::tuple::{TupleLength, TupleType};
@@ -2762,6 +2763,51 @@ impl<'a, 'db> ArgumentTypeChecker<'a, 'db> {
             .or(self.signature.return_ty)
             .zip(self.call_expression_tcx.annotation);
 
+        let tcx_specialization = self
+            .call_expression_tcx
+            .annotation
+            .and_then(|annotation| annotation.class_specialization(self.db));
+
+        let promote_literals = |typevar: GenericContextTypeVar<'db>, ty: Type<'db>| -> Type<'db> {
+            let bound_typevar = typevar.bound_typevar();
+
+            if typevar.is_inherited() && bound_typevar.variance(self.db).is_invariant() {
+                return ty.promote_literals(
+                    self.db,
+                    TypeContext::new(
+                        tcx_specialization
+                            .and_then(|specialization| specialization.get(self.db, bound_typevar)),
+                    ),
+                );
+            }
+
+            let Some(return_specialization) = self
+                .signature
+                .return_ty
+                .and_then(|return_ty| return_ty.class_specialization(self.db))
+            else {
+                return ty;
+            };
+
+            if let Some((typevar, _)) = return_specialization
+                .generic_context(self.db)
+                .variables(self.db)
+                .zip(return_specialization.types(self.db))
+                .find(|(_, ty)| **ty == Type::TypeVar(bound_typevar))
+                .filter(|(typevar, _)| typevar.variance(self.db).is_invariant())
+            {
+                return ty.promote_literals(
+                    self.db,
+                    TypeContext::new(
+                        tcx_specialization
+                            .and_then(|specialization| specialization.get(self.db, typevar)),
+                    ),
+                );
+            }
+
+            ty
+        };
+
         self.inferable_typevars = generic_context.inferable_typevars(self.db);
         let mut builder = SpecializationBuilder::new(self.db, self.inferable_typevars);
 
@@ -2811,7 +2857,9 @@ impl<'a, 'db> ArgumentTypeChecker<'a, 'db> {
         }
 
         // Build the specialization first without inferring the complete type context.
-        let isolated_specialization = builder.build(generic_context, self.call_expression_tcx);
+        let isolated_specialization = builder
+            .mapped(generic_context, promote_literals)
+            .build(generic_context);
         let isolated_return_ty = self
             .return_ty
             .apply_specialization(self.db, isolated_specialization);
@@ -2836,7 +2884,9 @@ impl<'a, 'db> ArgumentTypeChecker<'a, 'db> {
             builder.infer(return_ty, call_expression_tcx).ok()?;
 
             // Otherwise, build the specialization again after inferring the complete type context.
-            let specialization = builder.build(generic_context, self.call_expression_tcx);
+            let specialization = builder
+                .mapped(generic_context, promote_literals)
+                .build(generic_context);
             let return_ty = return_ty.apply_specialization(self.db, specialization);
 
             Some((Some(specialization), return_ty))
diff --git a/crates/ty_python_semantic/src/types/class.rs b/crates/ty_python_semantic/src/types/class.rs
index 18d3d4b900eac9..1e2475e8e78929 100644
--- a/crates/ty_python_semantic/src/types/class.rs
+++ b/crates/ty_python_semantic/src/types/class.rs
@@ -1475,7 +1475,7 @@ impl<'db> ClassLiteral<'db> {
     /// promote any typevars that are inferred as a literal to the corresponding instance type.
     fn inherited_generic_context(self, db: &'db dyn Db) -> Option<GenericContext<'db>> {
         self.generic_context(db)
-            .map(|generic_context| generic_context.promote_literals(db))
+            .map(|generic_context| generic_context.set_inherited(db))
     }
 
     pub(super) fn file(self, db: &dyn Db) -> File {
diff --git a/crates/ty_python_semantic/src/types/generics.rs b/crates/ty_python_semantic/src/types/generics.rs
index 11b708cf695faf..a69688f756ca92 100644
--- a/crates/ty_python_semantic/src/types/generics.rs
+++ b/crates/ty_python_semantic/src/types/generics.rs
@@ -184,21 +184,31 @@ impl<'a, 'db> InferableTypeVars<'a, 'db> {
 #[derive(Copy, Clone, Debug, Eq, Hash, PartialEq, get_size2::GetSize)]
 pub struct GenericContextTypeVar<'db> {
     bound_typevar: BoundTypeVarInstance<'db>,
-    should_promote_literals: bool,
+    is_inherited: bool,
 }
 
 impl<'db> GenericContextTypeVar<'db> {
     fn new(bound_typevar: BoundTypeVarInstance<'db>) -> Self {
         Self {
             bound_typevar,
-            should_promote_literals: false,
+            is_inherited: false,
         }
     }
 
-    fn promote_literals(mut self) -> Self {
-        self.should_promote_literals = true;
+    /// Returns `true` if this type variable is inherited from the generic context of an
+    /// outer class.
+    pub fn is_inherited(&self) -> bool {
+        self.is_inherited
+    }
+
+    fn set_inherited(mut self) -> Self {
+        self.is_inherited = true;
         self
     }
+
+    pub fn bound_typevar(&self) -> BoundTypeVarInstance<'db> {
+        self.bound_typevar
+    }
 }
 
 /// A list of formal type variables for a generic function, class, or type alias.
@@ -262,14 +272,13 @@ impl<'db> GenericContext<'db> {
         Self::from_variables(db, type_params.into_iter().map(GenericContextTypeVar::new))
     }
 
-    /// Returns a copy of this generic context where we will promote literal types in any inferred
-    /// specializations.
-    pub(crate) fn promote_literals(self, db: &'db dyn Db) -> Self {
+    /// Mark the variables in this generic context as inherited from an outer class definition.
+    pub(crate) fn set_inherited(self, db: &'db dyn Db) -> Self {
         Self::from_variables(
             db,
             self.variables_inner(db)
                 .values()
-                .map(|variable| variable.promote_literals()),
+                .map(|variable| variable.set_inherited()),
         )
     }
 
@@ -1321,31 +1330,30 @@ impl<'db> SpecializationBuilder<'db> {
         &self.types
     }
 
-    pub(crate) fn build(
-        &mut self,
+    pub(crate) fn mapped(
+        &self,
         generic_context: GenericContext<'db>,
-        tcx: TypeContext<'db>,
-    ) -> Specialization<'db> {
-        let tcx_specialization = tcx
-            .annotation
-            .and_then(|annotation| annotation.class_specialization(self.db));
-
-        let types =
-            (generic_context.variables_inner(self.db).iter()).map(|(identity, variable)| {
-                let mut ty = self.types.get(identity).copied();
-
-                // When inferring a specialization for a generic class typevar from a constructor call,
-                // promote any typevars that are inferred as a literal to the corresponding instance type.
-                if variable.should_promote_literals {
-                    let tcx = tcx_specialization.and_then(|specialization| {
-                        specialization.get(self.db, variable.bound_typevar)
-                    });
-
-                    ty = ty.map(|ty| ty.promote_literals(self.db, TypeContext::new(tcx)));
-                }
+        f: impl Fn(GenericContextTypeVar<'db>, Type<'db>) -> Type<'db>,
+    ) -> Self {
+        let mut types = self.types.clone();
+        for (identity, variable) in generic_context.variables_inner(self.db) {
+            if let Some(ty) = types.get_mut(identity) {
+                *ty = f(*variable, *ty);
+            }
+        }
+
+        Self {
+            db: self.db,
+            inferable: self.inferable,
+            types,
+        }
+    }
 
-                ty
-            });
+    pub(crate) fn build(&mut self, generic_context: GenericContext<'db>) -> Specialization<'db> {
+        let types = generic_context
+            .variables_inner(self.db)
+            .iter()
+            .map(|(identity, _)| self.types.get(identity).copied());
 
         // TODO Infer the tuple spec for a tuple type
         generic_context.specialize_partial(self.db, types)
diff --git a/crates/ty_python_semantic/src/types/infer/builder.rs b/crates/ty_python_semantic/src/types/infer/builder.rs
index c2274127524d4a..f8fa9422d108b9 100644
--- a/crates/ty_python_semantic/src/types/infer/builder.rs
+++ b/crates/ty_python_semantic/src/types/infer/builder.rs
@@ -6195,7 +6195,7 @@ impl<'db, 'ast> TypeInferenceBuilder<'db, 'ast> {
                         SpecializationBuilder::new(db, generic_context.inferable_typevars(db));
 
                     let _ = builder.infer(return_ty, declared_return_ty);
-                    let specialization = builder.build(generic_context, call_expression_tcx);
+                    let specialization = builder.build(generic_context);
 
                     parameter_type = parameter_type.apply_specialization(db, specialization);
                 }
@@ -6881,9 +6881,8 @@ impl<'db, 'ast> TypeInferenceBuilder<'db, 'ast> {
             }
         }
 
-        let class_type = class_literal.apply_specialization(self.db(), |_| {
-            builder.build(generic_context, TypeContext::default())
-        });
+        let class_type =
+            class_literal.apply_specialization(self.db(), |_| builder.build(generic_context));
 
         Type::from(class_type).to_instance(self.db())
     }
diff --git a/crates/ty_python_semantic/src/types/variance.rs b/crates/ty_python_semantic/src/types/variance.rs
index 5ec1d5a8ffb2bf..9d60c8cf763e8c 100644
--- a/crates/ty_python_semantic/src/types/variance.rs
+++ b/crates/ty_python_semantic/src/types/variance.rs
@@ -92,6 +92,10 @@ impl TypeVarVariance {
             TypeVarVariance::Covariant | TypeVarVariance::Bivariant
         )
     }
+
+    pub(crate) const fn is_invariant(self) -> bool {
+        matches!(self, TypeVarVariance::Invariant)
+    }
 }
 
 impl std::iter::FromIterator<Self> for TypeVarVariance {