New insight into the temperature dependent evolution of internal strain in the austenite phase during the martensitic phase transformation in NiTi shape memory alloys is provided via classical molecular dynamics simulations that employ well-established interatomic potentials for NiTi. It is shown, for the first time, that the developed strain tensor in the austenite phase is tetragonal in nature, with exponential temperature-dependence. Equally importantly, it is found that the developed internal strain (parallel to the habit plane) in the austenite varies linearly with the evolving martensite phase fraction. Interestingly, the Richard’s equation is found to describe the temperature dependence of the martensite phase fraction as well as the internal strain components parallel to the habit plane in the austenite phase. An analysis of the temperature dependent phonon dispersion of strained austenite revealed the competition between phonon softening of the TA2 branch and internal strain that leads to stabilization of the austenite phase in the two phase regime.