Great question!  Literary fiction is a moving target, and it depends on what you're comparing it to.  In the past, genre fiction of any sort was never considered 'literary' -- now that is less true.  On the commercial to literary fiction continuum, literary fiction tends to be more character driven than plot driven.  The literary author might play with words or structure more than the more commercial author.  Commercial authors typically sell more copies of their books.  Literary authors, however, win book prizes -- if they're both very good and very lucky. 

If your question is related to how to pitch your manuscript to an agent/publisher, your best bet is to compare it to other titles in their stable, and label your book with the same descriptor that fits the title that's closest to yours.