Hello @Sailendra Kumar Reddy Challa,
In addition to the information provided by @Sidney Murciano , could you please share us the error message screenshot.
Could you please let us know why the user tried to enter the correct code from the disabled hardware.
Please let us know if the Hardware OATH token settings is disabled tenant wide for all the users or for some specific users.
Please make sure if the below steps are configured correctly.
To enable hardware OATH tokens in the Microsoft Entra admin center:
1.Sign in to the Microsoft Entra admin center as at least an Authentication Policy Administrator.
2.Browse to Entra ID > Authentication methods > Hardware OATH tokens (Preview).
3.Select Enable, choose which groups of users to include in the policy, and select Save.
We recommend that you migrate to the Authentication methods policy to manage hardware OATH tokens. If you enable OATH tokens in the legacy MFA policy, browse to the policy in the Microsoft Entra admin center as an Authentication Policy Administrator: Entra ID > Multifactor authentication > Additional cloud-based multifactor authentication settings. Clear the checkbox for Verification code from mobile app or hardware token.
Please let me know if you have any queries.