The target address in 365 would be an accepted domain in on-prem Exchange.
This isnt about DNS, it would be how you have your accepted domains configured in Exchange Online
So for example:
If your domain is contoso.com, you would have that set in both on-prem and in Exchange Online.
In Exchange Online , ensure contoso.com is set as an internal relay:
Internal relay (also known as non-authoritative): Recipients for this domain can be in Microsoft 365 or Office 365 or your own email servers. Email is delivered to known recipients in Office 365 or is relayed to your own email server if the recipients aren't known to Microsoft 365 or Office 365.
Also ensure you have a connector between Exchange Online and on-prem ( You probably already do)
If you select this option, you must create a connector for mail flow from Microsoft 365 or Office 365 to your on-premises email server; otherwise recipients on the domain who are not hosted in Microsoft 365 or Office 365 won't be able to receive mail on your own email servers. For more information about setting up connectors, see Set up connectors to route mail between Microsoft 365 or Office 365 and your own email servers.
Thats it! Messages sent to on-prem mailboxes will then get correctly routed.