The development of compressive residual stress is governed by the metallurgical transformation and associated microstructure, which in turn influences the mechanical properties of a welded structure. In the present work, the microstructural interaction with the thermo-mechanical performance of Yb-Fiber laser-welded austenitic stainless steel (SS304) is evaluated at different heat inputs and varying defocus distances. The interrelation between microstructural morphology and the typical pattern of residual stress is systematically investigated. The development of the thermal-metallurgical-mechanical model particularly considers the effect of solid-state phase transformation (SSPT) such that the model predicts the phase fraction and its influence on residual stress distribution. The present study exclusively focuses on the mechanism of residual stress generation as a consequence of dual-phase microstructural evolution during solidification. Low heat input (45J/mm) leads to a high cooling rate, excellent tensile strength, and low tensile residual stress. The finite element-based thermo-mechanical model predicts the residual stress with a maximum deviation of ±50 MPa compared to the experimental value. The Ferritic-austenitic (FA) mode of solidification results in the combination of skeletal and lathy δ-ferrite morphology. Increasing peak intensity of δ {110} with a cooling rate confirms the enhancement of δ-phase within the austenite matrix and restricts the complete transformation to the austenitic phase. A relatively high amount of δ-ferrite due to enriched Cr and lean Ni content at the dendritic core with fine or acicular morphology at a high cooling rate reduces the longitudinal and transverse residual stress significantly. Besides, the increasing trend of primary dendritic arm-size of δ-ferrite yields a gradual increase in residual stress.