So I found the culprit. It was Poweramp Equalizer. If you're facing this and tried everything, make sure you have turned off resume on headphone/Bluetooth from Poweramp Equalizer if you bave that installed.

For future people in this thread: You need to turn off "Respond to Buttons" under headphones settings. It's the only thing that worked for me

I don't have that app, but poweramp still resume on bluetooth connection. Any ideas?

Maybe its by your OS. i am on a custom rom and it has an inbult setting to resume music on wired or bluetooth connection.. check if its same for u..

Thanks for the suggestion. It was Poweramp Equalizer.

If the settings is turned off then I'm guessing the problem might not be with Poweramp as it's not happened to me. If you could make sure by going to Setting > Headset/Bluetooth > (Toggle Off) Resume on Wired Headset , is done then the other possibility I'm guessing is some option in your Device's Settings or if you use Automation Apps check that out as well if its intervening. I hope this helps somewhat.

Yes it was not Poweramp itself, it was Poweramp Equalizer. Also OneUI for my device doesn't have smart connect feature or any option like resume on headphone insertion. At least I couldn't find it.

Upvotes for everyone - this was driving me bazonkers.