Raised an SR and got confirmation.
We should not get confused on the Below statement.
We should apply all Critical pre-upgrade patches for Financials in preinstall mode and 7303029:12.1.0 in "preinstall" mode and then merge those with main driver.
Clean up of preinstall directory only requires when there is any other patch applied in preinstall mode( which is not part of upgrade ), only those needs to get cleaned up.
Thanks for the update and for sharing the solution!