Certain keys of the magic keyboard are not working at user login screen of iMac so I cant enter my password. Most of the keys are working though. the only way to enter password is by using onscreen keyboard. Once logged in, keyboard is working as normal so it cant be a hardware (keyboard) problem.
Please reset the SMC 3-4 times back to back and then retest. To learn how to reset the SMC please click SMC Reset
Finally the issue has been resolved. I had unknowingly enabled "mouse keys". all keys started working when mouse keys were unchecked.
here is how mouse keys can be disabled.
System preferences > users and groups > login options > accessibility options > uncheck mouse keys
Mouse keys can also be disabled directly from the user login screen by pressing Option + Command + F5 and then uncheck mouse keys.
Certain keyboard keys not working at iMac user login screen,
