Update: In Adguard turn the blocking method to NXDOMAIN so it won’t give this error. It still gives a warning that “you’re using a VPN”. Edit: I am on iOS 26.
Broader Context: All Indian Banking apps have been instructed to not allow the use of VPN slot while using a banking app. The Central Bank has also ordered to disallow usage if Developers Options are turned on. Apart from that globally all banking apps require Google Play Services and Boot-loader to be locked. I also found on some reddit post that they are not allowing the use of a 5 year old + phones for banking.
Please cross-post to a privacy community. Ultimately, this sounds like it’s going to produce a situation where a dumbphone that allows for hotspots and them a smartphone without UPI or a SIM and with a VPN are a workable solution.