This paper proposes an online noncontact fault detection method during light emitting diode (LED) chip packaging, which is based on the photovoltaic effect in p-n junctions. Once a LED chip bonded on a lead frame is illuminated, the photocurrent will flow through the loop circuits formed by the lead frame. Through characterization of the weak photovoltaic response in the lead frame with the 20 LED chips, five LED faults, including chip defects (chip quality and chip contamination) and bonding deficiencies (disconnection, debonding, and rebonding), can be detected before packaging. A high-sensitivity photocurrent detection instrument has been developed to detect different color (red, yellow, green, and blue) and different size LED chips (9-15 mil) on LED assembly line. A key feature of the new instrument is the capability to tune and implement the maximum output power (photocurrent) in the loop lead frame by designing the high-efficiency magnetic core, the magnetic coil and the detecting system. Experiments demonstrate that the photovoltaic behaviors for LED p-n junctions are directly related to the LED electroluminescent characteristics, and the internal optoelectronic characteristics and the external Ohmic contact performances can be derived by detecting the photocurrent of LED chips. The LED online noncontact fault detection instrument based on the photovoltaic effect can be used to substitute for the ordinary electroluminescence online contact fault detection instrument.