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I selected the options as per image and created a folder structure inside:

C:\Program Files (x86)\Microsoft Visual Studio 14.0\SDK\Bootstrapper\Packages
I have created vcredist_x64 folder which contains:
vcredist_x64.exe
product.xml
en folder
Inside en folder I have:
package.xml
Contents of product.xml:
<?xml version="1.0" encoding="utf-8" ?> 
  <Product
    xmlns="http://schemas.microsoft.com/developer/2004/01/bootstrapper"
    ProductCode="Microsoft.Visual.C++.11.0.x64"
  <!-- Defines list of files to be copied on build -->
  <PackageFiles>
  <PackageFile Name="vcredist_x64.exe" HomeSite="VCRedistExe"/>
  </PackageFiles>
  <InstallChecks>
    <MsiProductCheck Property="VCRedistInstalled" Product="{e46eca4f-393b-40df-9f49-076faf788d83}"/>
   </InstallChecks>
   <!-- Defines how to invoke the setup for the Visual C++ 11.0 redist -->
   <!-- TODO: Needs EstimatedTempSpace, LogFile, and an update of EstimatedDiskSpace -->
    <Commands Reboot="Defer">
    <Command PackageFile="vcredist_x64.exe" 
      Arguments=' /q:a ' 
     <!-- These checks determine whether the package is to be installed -->
  <InstallConditions>
    <BypassIf Property="VCRedistInstalled" Compare="ValueGreaterThanOrEqualTo" Value="3"/>
    <!-- Block install if user does not have admin privileges -->
    <FailIf Property="AdminUser" Compare="ValueEqualTo" Value="false" String="AdminRequired"/>
    <!-- Block install on any platform other than x64 -->
    <FailIf Property="ProcessorArchitecture" Value="AMD64" Compare="ValueNotEqualTo" String="InvalidOS"/>
    <!-- Block install on Vista or below -->
    <FailIf Property="VersionNT" Compare="VersionLessThan" Value="6.00" String="InvalidPlatformWinNT"/>
  </InstallConditions>
  <ExitCodes>
    <ExitCode Value="0" Result="Success"/>
    <ExitCode Value="3010" Result="SuccessReboot"/>
    <DefaultExitCode Result="Fail" FormatMessageFromSystem="true" String="GeneralFailure" />
  </ExitCodes>
</Command>
 </Commands>
</Product>
Contents of en\package.xml:
<?xml version="1.0" encoding="utf-8" ?>
<Package
  xmlns="http://schemas.microsoft.com/developer/2004/01/bootstrapper"
  Name="DisplayName"
  Culture="Culture"
    <!-- Defines a localizable string table for error messages-->
    <Strings>
        <String Name="DisplayName">Visual C++ "14" Runtime Libraries (x64)</String>
        <String Name="Culture">en</String>
        <String Name="AdminRequired">You do not have the permissions required to install Visual C++  Runtime Libraries (x64). Please contact your administrator.</String>
        <String Name="InvalidOS">Installation of Visual C++  Runtime Libraries (x64) is supported only on x64 machines.</String>
        <String Name="GeneralFailure">A failure occurred attempting to install Visual C++  Runtime Libraries (x64).</String>
          <String Name="VCRedistExe">http://go.microsoft.com/fwlink/?LinkID=210622&amp;clcid=0x409</String>
     </Strings>
    </Package>
When I build the setup project, it gives no errors. 
Initially when I didn't have that folder structure along with the xmls I had the error on build:
enable 'Download prerequisites from the same location as my application'   in the Prerequisites dialog box, you must download file 'vcredist_x64\vcredist_x64.exe' for item 'Visual C++ "14" Runtime Libraries (x64)' to your local machine. For more information, see http://go.microsoft.com/fwlink/?LinkId=616018.
However I have no errors now. The problem is that it does not install the VC redistributable dependency.
I believe that the productcode and other parameters are not correct in the xmls. Also the VCRedistExe link is for VC++2010 but it does not download anything during setup. However do note that I have the vcredist_x64.exe inside the folder structure which is the VC++14 redist.
Please help me as I have tried many other options as well, and this "official" option does not seem to work (I could not find relevant info Visual C++ Redistributable for Visual Studio 2015).
Either option is fine for me (download from website or download from the same location as my app) as long as the prerequisite is installed.
There is an open issue with MS.
https://connect.microsoft.com/VisualStudio/feedback/details/1604832/vcredist-bootstrapper-packages-in-vs-2015-sdk-arent-working
Here is the link to the 2015 redistributable packages.
https://www.microsoft.com/en-us/download/details.aspx?id=48145
For 32 bit Operating system, check this registry key using regedit
HKLM\Software\Microsoft\GenericBootstrapper\
For 64 bit OS,
HKLM\Software\Wow6432Node\Microsoft\GenericBootstrapper
The path value is the location where you need to place your redistributables.
For example, if u want to place your VC++ 64 bit redistributable(vc_redist.x64.exe)..
if the location is "C:\Program Files (x86)\Microsoft SDKs\ClickOnce Bootstrapper\" in the path value, 
place the vc_redist.x64.exe file in "C:\Program Files (x86)\Microsoft SDKs\ClickOnce Bootstrapper\Packages\vc_redistx64\".
Rebuild the project, it works fine now
        
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