diff --git a/packages/jsii/lib/assembler.ts b/packages/jsii/lib/assembler.ts
index fad2c3090c..8d8d0f79d3 100644
--- a/packages/jsii/lib/assembler.ts
+++ b/packages/jsii/lib/assembler.ts
@@ -320,11 +320,7 @@ export class Assembler implements Emitter {
         return undefined;
       }
       const readmePath = path.join(this.projectInfo.projectRoot, fileName);
-      const renderedLines = await literate.includeAndRenderExamples(
-        await literate.loadFromFile(readmePath),
-        literate.fileSystemLoader(this.projectInfo.projectRoot),
-      );
-      return { markdown: renderedLines.join('\n') };
+      return loadAndRenderReadme(readmePath, this.projectInfo.projectRoot);
     }
 
     function _loadDocs(this: Assembler): spec.Docs | undefined {
@@ -729,7 +725,10 @@ export class Assembler implements Emitter {
         symbol,
       );
       const targets = await loadSubmoduleTargetConfig(sourceFile.fileName);
-      const readme = await loadSubmoduleReadMe(sourceFile.fileName);
+      const readme = await loadSubmoduleReadMe(
+        sourceFile.fileName,
+        this.projectInfo.projectRoot,
+      );
 
       this._submodules.set(symbol, {
         fqn,
@@ -793,18 +792,13 @@ export class Assembler implements Emitter {
      */
     async function loadSubmoduleReadMe(
       submoduleMain: string,
+      projectRoot: string,
     ): Promise<SubmoduleSpec['readme']> {
       const fileBase = path.basename(submoduleMain).replace(/(\.d)?\.ts$/, '');
       const readMeName =
         fileBase === 'index' ? `README.md` : `${fileBase}.README.md`;
       const fullPath = path.join(path.dirname(submoduleMain), readMeName);
-
-      if (!(await fs.pathExists(fullPath))) {
-        return undefined;
-      }
-      return {
-        markdown: await fs.readFile(fullPath, { encoding: 'utf-8' }),
-      };
+      return loadAndRenderReadme(fullPath, projectRoot);
     }
   }
 
@@ -3481,3 +3475,19 @@ function isUnder(file: string, dir: string): boolean {
   const relative = path.relative(dir, file);
   return !relative.startsWith(path.sep) && !relative.startsWith('..');
 }
+
+async function loadAndRenderReadme(readmePath: string, projectRoot: string) {
+  if (!(await fs.pathExists(readmePath))) {
+    return undefined;
+  }
+
+  return {
+    markdown: (
+      await literate.includeAndRenderExamples(
+        await literate.loadFromFile(readmePath),
+        literate.fileSystemLoader(path.dirname(readmePath)),
+        projectRoot,
+      )
+    ).join('\n'),
+  };
+}
diff --git a/packages/jsii/lib/literate.ts b/packages/jsii/lib/literate.ts
index 2ebf048708..5d6b812989 100644
--- a/packages/jsii/lib/literate.ts
+++ b/packages/jsii/lib/literate.ts
@@ -71,7 +71,14 @@ export function typescriptSourceToMarkdown(
   return markdownLines;
 }
 
-export type FileLoader = (relativePath: string) => string[] | Promise<string[]>;
+export interface LoadedFile {
+  readonly fullPath: string;
+  readonly lines: string[];
+}
+
+export type FileLoader = (
+  relativePath: string,
+) => LoadedFile | Promise<LoadedFile>;
 
 /**
  * Given MarkDown source, find source files to include and render
@@ -84,6 +91,7 @@ export type FileLoader = (relativePath: string) => string[] | Promise<string[]>;
 export async function includeAndRenderExamples(
   lines: string[],
   loader: FileLoader,
+  projectRoot: string,
 ): Promise<string[]> {
   const ret: string[] = [];
 
@@ -94,9 +102,12 @@ export async function includeAndRenderExamples(
       // Found an include
       const filename = m[2];
       // eslint-disable-next-line no-await-in-loop
-      const source = await loader(filename);
+      const { lines: source, fullPath } = await loader(filename);
       // 'lit' source attribute will make snippet compiler know to extract the same source
-      const imported = typescriptSourceToMarkdown(source, [`lit=${filename}`]);
+      // Needs to be relative to the project root.
+      const imported = typescriptSourceToMarkdown(source, [
+        `lit=${toUnixPath(path.relative(projectRoot, fullPath))}`,
+      ]);
       ret.push(...imported);
     } else {
       ret.push(line);
@@ -125,7 +136,10 @@ export function contentToLines(content: string): string[] {
  * Return a file system loader given a base directory
  */
 export function fileSystemLoader(directory: string): FileLoader {
-  return (fileName) => loadFromFile(path.resolve(directory, fileName));
+  return async (fileName) => {
+    const fullPath = path.resolve(directory, fileName);
+    return { fullPath, lines: await loadFromFile(fullPath) };
+  };
 }
 
 const RELEVANT_TAG = '/// !show';
@@ -215,3 +229,7 @@ function markdownify(
     }
   }
 }
+
+function toUnixPath(x: string) {
+  return x.replace(/\\/g, '/');
+}
diff --git a/packages/jsii/test/literate.test.ts b/packages/jsii/test/literate.test.ts
index 74d44ddf5d..d34bd549ef 100644
--- a/packages/jsii/test/literate.test.ts
+++ b/packages/jsii/test/literate.test.ts
@@ -99,10 +99,17 @@ test('can do example inclusion', async () => {
 
   const fakeLoader = (fileName: string) => {
     expect(fileName).toBe('test/something.lit.ts');
-    return ['const x = 1;', '/// This is how we print x', 'console.log(x);'];
+    return {
+      fullPath: fileName,
+      lines: ['const x = 1;', '/// This is how we print x', 'console.log(x);'],
+    };
   };
 
-  const rendered = await includeAndRenderExamples(inputMarkDown, fakeLoader);
+  const rendered = await includeAndRenderExamples(
+    inputMarkDown,
+    fakeLoader,
+    '.',
+  );
 
   expect(rendered).toEqual([
     'This is a preamble',
diff --git a/packages/jsii/test/submodules.test.ts b/packages/jsii/test/submodules.test.ts
index a924a24137..244e5e8d58 100644
--- a/packages/jsii/test/submodules.test.ts
+++ b/packages/jsii/test/submodules.test.ts
@@ -60,6 +60,30 @@ test('submodules loaded from directories can have targets', async () => {
   );
 });
 
+test('submodule READMEs can have literate source references', async () => {
+  const assembly = await sourceToAssemblyHelper({
+    'index.ts': 'export * as submodule from "./subdir"',
+    'subdir/index.ts': 'export class Foo { }',
+    'subdir/README.md':
+      'This is the README\n\n[includable](./test/includeme.lit.ts)',
+    'subdir/test/includeme.lit.ts': '// Include me',
+  });
+
+  expect(assembly.submodules!['testpkg.submodule']).toEqual(
+    expect.objectContaining({
+      readme: {
+        markdown: [
+          'This is the README',
+          '',
+          '```ts lit=subdir/test/includeme.lit.ts',
+          '// Include me',
+          '```',
+        ].join('\n'),
+      },
+    }),
+  );
+});
+
 type ImportStyle = 'directly' | 'as namespace' | 'with alias';
 
 test.each(['directly', 'as namespace', 'with alias'] as ImportStyle[])(