Residual strain distributions in similar and dissimilar welds were measured using neutron diffraction (ND) method. Then, using three strain components, three-dimensional stress states were calculated. The results were used to determine the effect of the martensite phase transformation and material properties on residual stress (RS) distribution. It was observed that smaller longitudinal RS was induced in the low carbon steel side of dissimilar weld when compared to its similar weld. Also, it was found that the transverse RS near and within the weld zone (WZ) in dissimilar weld exhibited a distinctive trend, with tensile mode reaching the yield strength of the base metal (BM). In order to characterize the WZ in dissimilar weld, optical microscopy, hardness, energy dispersive X-ray spectroscopy (EDAX) were employed. This study not only provides further insight into the RS state in similar and dissimilar welds; it also delivers important consequences of phase transformation in the latter case.